Optimism abounds in India. Entrepreneurial spirit was unleashed by wide-ranging liberalising reforms that commenced in 1991. The Indian economy has shifted to a much faster growth trajectory, led by the dynamism of its INDIA’S SECTOR: Unlocking Opportunity SERVICES services sector – particularly high-end, knowledge-intensive services exports. Studies by a number of prominent analytical organisations are now projecting that India could outperform all of the world’s major economies over the next fifty years. By 2050, it could be the third largest economy in the world by a significant margin. Such developments would profoundly shift the world’s centre of economic gravity.
This report does not seek either to substantiate or to disprove these rosy projections. Instead we ask: How might it happen? Is there a plausible path from today’s India to the projected giant economy of 2050? What opportunities might successful pursuit of that path generate for Australian services providers? And finally, what factors need to be taken into account along the way as Australian companies consider whether they should be seeking to participate directly in India’s growth?
The report looks beyond headline services such as information technology and IT enabled services to examine emerging export and investment opportunities in education, telecommunications, financial services, infrastructure, construction management, tourism, film, healthcare, sports and related infrastructure, biotechnology, mining, retail, logistics and professional services. And it highlights the successes of some of the Australian services providers behind Australia’s increasingly dynamic services trade relationship with India.
www.dfat.gov.au/eau INDIA’S SERVICES SECTOR Unlocking Opportunity DFAT Australian Government Department of Foreign Affairs and Trade Economic Analytical Unit
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India’s services sector: unlocking opportunity.
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Cover photo by Adrian Westwood, Firefly Creative. Executive Summary
executive summaryI
‘In 1991, with India running out of hard currency, Manmohan Singh…decided that India had to open its economy. “Our Berlin Wall fell…and it was like unleashing a caged tiger… We went from quiet self-confidence to outrageous ambition in a decade” [Tarun Das, Chief Mentor, Confederation of Indian Industries].’ (Thomas Friedman, The World is Flat)
Optimism abounds in India. Well it might. Keynote reforms, initiated by the then Finance Minister Dr Manmohan Singh in 1991, provided the momentum for a major reduction of the role of the public sector in the economy, a degree of deregulation, and greater integration of India’s economy into international markets. India’s entrepreneurial spirit was unleashed.
The result has been a shift from India’s traditional annual GDP growth rates of around 3.5 per cent to a much faster growth trajectory. Between 1991 and 2005 the economy expanded at an annual average of around six per cent. In the past three years growth has been higher still, at around eight per cent. Growth for 2006–07 may be even higher, with the economy expanding at an annualised rate of 9.2 per cent in the third quarter of 2006.
These figures call to mind the performance of the economic success stories of East Asia – Japan, Taiwan, the Republic of Korea, the high-growth ASEAN economies and, most recently, China. Extrapolating from macro factors – such as demographics and potential for technological ‘catch-up’ – and assuming an ongoing reform effort, studies by a number of prominent analytical organisations have projected that India could even outperform these dynamic economies over the next fifty years. If so, these studies claim, by 2050 India could be the third-largest economy in the world (in market exchange rate terms) by a significant margin, behind only China and the United States. Such developments would profoundly shift the world’s economic centre of gravity.
This study does not seek either to substantiate or to disprove these rosy projections. Any such attempt would be futile. Too much is dependent on factors which cannot be plausibly predicted, such as the ongoing willingness and ability of Indian governments to sustain a reform program over long periods; the health of the international economy; new developments in technology; and the shape of the international trading system. Instead we ask: How might it happen? Is there a plausible path from today’s India to the projected giant economy of 2050? What opportunities might successful pursuit of that path generate for Australian services providers? And finally, what factors need to be taken into account along the way as Australian companies consider whether they should be seeking to participate directly in India’s growth?
While some contend that growth picked up in the 1980s, Panagariya (2005) points out that growth was patchy. Growth was strong over 1988–89 to 1990–91, but this was largely a reflection of the liberalisation and deregulation measures under Prime Minister Rajiv Gandhi as well as expansionary policies that ended in the economic crisis of June 1991. It was the more systematic and deeper reforms commencing in 1991 that helped sustain India’s economic growth.
P A G E iii INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
Why services?
This report focuses specifically on the services sector because of the central importance of services to India’s current economic expansion. Whereas the East Asian economies’ success has largely been built on the development of export-oriented manufacturing, India’s recent growth has been led by the dynamism of its services sector – particularly high-end, knowledge-intensive services exports. Services have consistently grown at a faster pace than the economy as a whole since 1991, when the reform effort was kicked off in earnest. They now occupy some 60 per cent of India’s GDP, based on the WTO definition of services which includes construction. Manufacturing, by contrast, has maintained a stubbornly static share in the economy at around 20 per cent, while that of agriculture – still far and away the largest employer – has dwindled. Productivity growth in India, unlike virtually all other regions of the world, has been strongest in services (IMF 2006).
This is not to say that developments in other sectors are unimportant; nor that the profile of India’s economy will remain static over time. Already, for example, there are signs of an acceleration in the growth of India’s manufacturing sector. But to date, it has been services that have led the way; and their sheer size within the economy means they will continue to have a critical role.
This is an unusual growth path. In terms of per capita income India remains a poor country. Yet the services-dependent profile of its economy is much closer to that which has typically been associated with middle-income developing countries. In general, development of the services sector occurs after developments in agriculture and manufacturing. In India’s case, the reverse has occurred.
How can the services boom lead to sustainable growth?
For the reformist approach that has led to India’s recent growth to be politically sustainable in the medium to long term, it must demonstrate benefits to all strata of society. The key imperative for Indian policy-makers is to improve the situation of a huge and growing, but relatively low skilled, rural working class. This means creating vast numbers of appropriate jobs. But the main driver of growth in the economy since 1991 has been a knowledge-intensive sector, which is never likely to become a mass employer of low-skilled labour. How to resolve the two?
Fieldwork in the course of this study suggested that, in the minds of many participants in the Indian economy, there is a plausible route by which services-led growth could lead to broader-based development, and consequently to job creation on the necessary scale. Put simply, this would involve growth of dynamic services export sectors such as Information Technology–Information Technology Enabled Services (IT–ITES), and the income that growth brings to the country, providing a major stimulus to domestic demand and hence catalysing reform and growth in other sectors – including infrastructure development, construction, manufacturing and retail. It is the consequent growth in these other sectors, particularly manufacturing, which might be expected to provide the bulk of the required jobs over time.
Though somewhat speculative, this idea, which is elaborated in Chapter 1, is of interest because it provides a plausible road map by which current developments might lead to the long-term projections.
P A G E iv Executive Summary
It also provides a framework for examination of India’s services sector as a whole which highlights the differing roles that different sub-sectors might play as the economy develops – and hence the differing types and timeframes for opportunities that are likely to arise for Australian services providers.
The roles of different sub-sectors
Within an overall framework of services-led growth, different services sub-sectors clearly have different roles to play. These are examined in Chapter 2.
Broadly speaking, the better performing services sub-sectors either have not been subject to significant amounts of regulation (notably IT–ITES) or have been deregulated and opened up to competition (most prominently, telecommunications and domestic air travel). Increased inward investment flows stemming from a relaxation of restrictions on foreign investment and particular inducements such as Special Economic Zones (SEZs) have helped underpin the performance of some of the faster growing services sectors.
Knowledge-based industries have been prominent among the fastest growing services. The relative lack of regulation and modest capital requirements in these industries have enabled them to capitalise on the advantages of a low-cost, educated workforce, technological advances and widespread English‑language capabilities. The rapid expansion of the export-oriented IT–ITES sector is much lauded, but several other key services are also growing strongly, including telecommunications, financial services, consulting services, private healthcare, and biotechnology services.
High-end services such as IT–ITES have an important role to play in India’s overall development on two levels. Their expansion has in large part been based on external demand, and has resulted in a significant increase in export earnings, as well as burgeoning inflows of foreign direct investment, with most of the multinational ‘majors’ now represented in India. This success has led, and will continue to lead, to expansion of the IT sector, which should in turn fuel increased domestic demand, as employment grows, creating requirements for new buildings and infrastructure, as well as the growth of an increasingly sophisticated and affluent consumer class. India’s world-class knowledge-based services are also increasingly assuming importance for the inputs they provide for other sectors of the Indian domestic economy – such as manufacturing, retail, and logistics – thereby improving productivity in those sectors and further enhancing growth prospects.
As growth continues, other services sectors also have a crucial role to play. A modern economy demands both an efficient telecommunications infrastructure to facilitate rapid information exchange and communication between economic units, and a financial sector which is able to provide sophisticated intermediation between capital providers and capital users so that resources are allocated efficiently within the economy. It also requires increasing sophistication in areas such as transport and power infrastructure to prevent disruptions to production and enable goods to be moved efficiently around the country; and in education and training to ensure that there is sufficient skilled labour to allow the economy to modernise.
P A G E INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
Reform measures within these ‘enabling’ sub-sectors vary considerably, although most services have been, and remain, less regulated by comparison with manufacturing. Significant changes have occurred in the financial sector, although foreign investment in banking and insurance remains heavily constrained. Within another sector crucial to the health of the economy – transport infrastructure – the picture is mixed. Ports have been considerably opened up to competition, but while reform has begun in respect of railways, and to a greater extent, roads, substantial investment is required in these sectors to bring them to an acceptable standard. Modernisation of airports is under way, but it has been fraught with delays and is struggling to keep pace with the major expansion in air travel that is taking place in India. Power shortages also remain a major constraint on growth – albeit one which the government is now seeking to address, including through the introduction of mechanisms designed to promote private and international investment in the sector.
Some business services important to facilitating growth – such as legal and accountancy services – remain largely protected from foreign competition, as does the retail sector. As reform and growth continues in other areas, these sectors can also be expected to come under further pressure to deregulate and modernise. Already shopping malls are springing up all over India in the face of seemingly insatiable demand. The first hypermarkets and department stores are starting to emerge – again bringing with them requirements for skills and approaches which to date have been little required in India, including modern distribution systems and integrated supply chains. While complete liberalisation of foreign investment rules in these areas is fraught with political difficulty and likely to be some way off, pressure for change can only be expected to increase as Indians increasingly travel overseas and experience international standards of service in these areas.
Opportunities for Australian services providers
The range and extent of changes that are foreseeable in the Indian economy as it continues to develop suggest that, as well as focusing on the obvious growth areas of IT–ITES, Australian services providers should be looking to a number of other sectors in considering how they might participate in India’s ongoing growth. Where they might do so is examined in Chapter 3.
In relation to IT–ITES, India’s role in creating and leading a ‘tradability revolution’ in services merits strong attention from Australian business. The most commonly highlighted aspect of this phenomenon has been the trend towards business process outsourcing and ‘offshoring’ of services to India. But it is very much a two-way process. As India’s exports of business services have exploded, so have its imports, reflecting a fundamental change in the way services are produced and delivered worldwide. And its major IT companies, such as Infosys, Wipro, Satyam and Tata Consulting Services (to name but a few), are increasingly expanding overseas, providing jobs for locals in host markets – including Australia.
Essentially, economic activity in this area is mirroring familiar developments in the manufacturing sector. Production is becoming more fragmented. Specialised activities are taking place in diverse locations, resulting in a rapid increase in services trade. Australia has very real strengths in this area and is well placed to participate in emerging services production networks – particularly in high-end services such as Information and Communications Technology (ICT)-enabled research and analysis.
P A G E vi Executive Summary
While a key focus of the dozens of Indian IT companies operating in Australia is the provision of IT solutions to local companies, a number of these companies are also using their Australian subsidiaries to secure or help take advantage of global market opportunities – leading to high-quality employment opportunities for Australians. As the trend to deliver services through international networks develops, cooperation and collaboration between Australian and Indian firms to service third markets could expand to the benefit of both countries. It will be important for Australian companies to understand the export opportunities created by complementarities between Indian and Australian services providers in this area.
While India is home to a number of world class companies, particularly in IT–ITES, Australian companies also have significant expertise that could augment India’s capabilities or meet India’s needs. Relevant areas include infrastructure development and related consultancy services; information technology; telecommunications; financial services; tourism and travel-related services; film and television; sports and related infrastructure, particularly in the context of New Delhi’s hosting of the 2010 Commonwealth Games; healthcare services; biotechnology; mining services; retail and logistics; and legal and accountancy services.
Perhaps the most striking example, however, is that of education and training. A major relationship already exists in this field, with more than 38 700 Indian student enrolments in Australian educational institutions for the 11 months to November 2006, principally at tertiary level. This number is still growing rapidly. Given the skills India’s development is likely to demand, there is ample scope for this relationship to continue to grow in the medium term – particularly as institutions take the opportunity to diversify their approaches to provision of education and training, including through the establishment of operations offshore and distance learning programs.
Expanding bilateral economic ties
The base of bilateral commercial activity on which Australian companies can build has grown rapidly. Chapter 4 examines this activity.
The bilateral commercial relationship has developed rapidly into one of vitality and energy, with strong support from governments. Numerous visits to India by senior Australian Ministers – highlighted by that of Prime Minister Howard in March 2006 – underpin what is now a major trading relationship. At the official level, Australia and India concluded a Trade and Economic Framework (TEF) in March 2006, which provides a clear structure for the further development of commercial relations.
India ranks twelfth overall as a trading partner of Australia. Total trade surpassed A$10 billion for the first time in 2005–06. India has been Australia’s second-fastest growing services export market over the past five years, in large part reflecting the strength of education exports – a direct spin-off from India’s rapid growth. Despite high levels of publicity for the relocation of corporate functions to India by some major companies, the balance of bilateral services trade is firmly in Australia’s favour. While Australian direct investment in India’s services sector is presently at modest levels, it is set to increase with some recent investment decisions and conclusion of contracts. Indian companies have made substantial investments in Australia’s services sector, most notably in IT.
P A G E vii INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
India’s business environment
A credible story can be told that would see the pattern of knowledge-intensive service-driven development which has been embarked upon by India feeding into the robust growth trajectory projected by Goldman Sachs and others. That said, the jury will remain out for some time on whether the benign scenario of ongoing growth – and particularly increased employment and welfare across the Indian economy – will come to pass. It is clear that many other less optimistic scenarios are also possible. Work by the World Economic Forum in collaboration with the Confederation of Indian Industry, for example, produced three possible scenarios for the future of the Indian economy, only one of which leads unequivocally to strong growth and broad-based development – and one of which leads equally unequivocally in the opposite direction (WEF 2005). Chapter 5, the final chapter of this report, seeks to identify relevant considerations for Australian companies considering a deeper involvement in India as a market for services exports.
The key question will be the ability of successive governments to sustain the momentum of reform. The success of reform in generating growth to date appears to have engendered a critical mass of political opinion that is in favour, in principle, of ongoing reform. But the devil, as always, is in the detail. Much can be, and has been, achieved through low-profile, administrative measures. However, achieving major necessary reforms remains difficult, particularly in flagship areas such as labour policy, privatisation, and foreign participation, whether through trade or investment. If the necessary political support is to be achieved, it is important that the benefits of economic growth are seen to be widely distributed.
Australian companies enjoy a degree of benefit from favourable Indian perceptions of their country, despite facing fierce competition for India’s attention from larger players such as the United States, Europe and China. Indians perceive Australia as a safe, relatively reasonably priced and friendly destination for their children’s education. English is widely spoken. So is cricket, whose capacity to engender fellow-feeling should not be underestimated. There are some similarities in the legal systems of the two countries, though these should not be overstated. There are also significant people-to-people links, through migration and education, which represent a potential asset when it comes to exploiting trade and investment opportunities. Recent efforts to broaden the base of the business relationships by federal and state government-led business missions to India have helped raise Australia’s profile and improve Indian awareness of Australian capabilities and expertise in a number of areas.
While India presents as a potentially attractive market for many Australian businesses, it also poses significant challenges, especially for smaller Australian companies. Success demands significant investment of time and effort in understanding the business environment, and the tenacity and resilience to overcome setbacks or delays. Key challenges include power and transport infrastructure shortcomings, and barriers and burdens that exist both formally in the regulatory framework and informally in the way it is administered. Increasing automation of transactions; reduction in bureaucratic discretion over licences and permits; and the activities of a free, vocal and critical media have improved transparency for business, but feedback from businesses active in the Indian market continues to suggest that issues remain. Prerequisites for building a successful business in the Indian market include thorough research and preparation, careful selection of a business partner or customer, and the ability to take a long-term view of the market.
P A G E viii Table of Contents
TABLE OF CONTENTSI
executive summary iii
TABLE OF CONTENTS ix
CHAPTER 1 services and india’s rise 1 Key points 1 Introduction: an emerging giant 2 The importance of services 4 Drivers of services sector growth 7 The way forward 12 Implications 14
CHAPTER 2 THE role of services in development 15 Key points 15 The drivers 17 The contributors 28 The slower reformers 35 Sectors vital to broad-based development 40 Interrelationship of services with manufacturing, agriculture and mining 45
CHAPTER 3 OPPORTUNITIES FOR australian service providers in india 49 Key points 49 Information technology 51 Telecommunications 52 Financial services 53 Infrastructure, construction management and consulting services 54 Education and training services 56 Tourism and travel-related services 59 Film and television 61 Sports and related infrastructure 62 Healthcare services 62 Research 63 Mining services 64 Retail 64 Logistics 65 Professional services 65
CHAPTER 4 the bilateral economic relationship 67 Key points 67 Overview of the relationship 68 Trade in services 70 Services investment 77 A platform for future growth 84
P A G E ix INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
CHAPTER 5 INDIA’S BUSINESS ENVIRONMENT: IMPLICATIONS FOR AUSTRALIAn COMPANIES 87 Key points 87 An improving business environment 89 Advantages for australian companies 100 Remaining hurdles 101 Strategies for success 107 rEFERENCES 109
AUTHORS 125
ECONOMIC ANALYTICAL UNIT 125
Acknowledgments 127
Also by the Economic Analytical Unit 131
P A G E C h a p t e r 1
services and india’s riseI
KEY POINTS
• Developments in India’s services sector potentially have worldwide significance, given
– the rapidly increasing importance of India’s economy, which could be the third-largest in the world by a significant margin in 2050, measured at market exchange rates;
– the unusually large role services play in the economy overall by comparison with other countries at similar stages of development; and
– changes in patterns of services production worldwide, in which India’s high-end services providers are playing a major role.
• Services have been a major contributor to India’s strong recent GDP growth.
– Rapidly increasing two-way trade in information technology and information technology enabled services (IT–ITES) and other high-end services sub-sectors has been a critical factor in India’s improved economic performance.
– Services have helped underpin India’s economic vibrancy through their linkages with other sectors of the economy.
• If accompanied by further economic reforms, increased demand for goods and services in the Indian economy resulting from the success of high-end services has the potential to drive robust growth in the medium term.
– Implementation of the reforms required to bring this growth about could engender changes in key services sectors that would open opportunities for participation by foreign companies.
P A G E INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
‘[Information Technology (IT) and IT Enabled Services] can do for India what automotives did for Japan and oil for Saudi Arabia.’ (Noshir Kaka, Principal, McKinsey & Company)
Introduction: an emerging giant
The first-time visitor to one of India’s major cities cannot but be struck by the energy, entrepreneurialism and optimism that abounds there. If much of the international commentary is to be believed, the optimism seems well-founded. A chorus of recent long-term projections, citing India’s growing workforce and the scope for it to increase productivity dramatically through technological ‘catch-up’ with the West, suggest India could be the world’s fastest growing major economy over the next 50 years, outstripping even China and other emerging market economies.
Assuming the maintenance of growth-supportive policy settings, ongoing reform, and no major adverse shocks, Goldman Sachs predicts annual real GDP growth of around six per cent through to 2040, tapering off slightly after that (Goldman Sachs 2003). Employing similar assumptions, PricewaterhouseCoopers forecast real average GDP growth of 5.2 per cent per annum in India through to 2050, compared to 3.9 per cent in China, Brazil and Mexico, and 4.8 per cent in Indonesia (PricewaterhouseCoopers 2006). The Economist Intelligence Unit projects annual average growth in India’s real GDP of 5.9 per cent through to 2030 (The Economist 2005b).
If realised, the analyses of Goldman Sachs et al would point to a significant re-alignment of the global economic order, as emerging economies, led by China and India, come to account for a much larger share of global economic output. They suggest India’s economy could rival – at market exchange rates – the size of the largest European countries by 2020 and outstrip Japan by 2032 to become the world’s third-largest economy after the United States and China (Goldman Sachs 2003). In purchasing power parity terms, India is already the world’s fourth-largest economy and will become the third-largest much sooner. Measured at market exchange rates, Goldman Sachs projects that by 2050 the Indian and Chinese economies will respectively be around 80 and 125 per cent of the size of the US economy.
These projections build on an impressive growth record since the then Finance Minister (and now Prime Minister) Manmohan Singh initiated key economic reforms in June 1991, resulting in reduced public sector participation in the economy, greater openness to international competition, and significant deregulation. Since those reforms, India’s economic growth has averaged around six per cent, far ahead of its previous sluggish performance; and over the past three years growth has been of the order of 7.5 to 8.5 per cent. GDP grew at 9.2 per cent during the third quarter of 2006, and most commentators estimate that India should be able to sustain growth rates of between 7.0 and 8.5 per cent in the near term (see for example, IMF 2006, The Economist 2006a and ADB 2006). Clearly, India is doing something right.
P A G E Servces and India’s Rise
In one important respect, India’s growth path to date resembles those of other key developing economies in Asia. That is, rapid growth in an export-oriented sector has been a key stimulus for growth in the economy as a whole. But China and the ASEAN countries rose to prominence through the rapid expansion of their export-oriented manufacturing, fuelled by significant foreign investment. By contrast, services – led by exports of business services from India’s burgeoning information technology and information technology enabled services (IT–ITES) sectors – have been the chief source of India’s recent economic success.
The extent to which India’s growth path can be sustained; whether growth generated in what remains one relatively small sector of the economy will translate into reform and growth in other sectors; and in particular whether it can adequately address India’s need to provide jobs for huge numbers of its unemployed and underemployed rural citizens, will have important implications not just for India itself, but also for the world economy.
This report examines the contribution of India’s services sector to the unfolding story of India’s economic development. It describes the role that headline growth sectors such as IT–ITES and telecommunications would play in catalysing reform and growth in other areas of the services sector and the Indian economy more broadly if this path to development is successfully pursued.
The report concludes that successful pursuit of India’s current growth path could open a wide range of opportunities for Australian services providers. Both sustained growth, and the reform and change within India which would need to accompany it, would create demand for new skills and capabilities within the Indian economy. Australian enterprises would be well placed to provide many of these capabilities, either through direct service provision or through education and training. It is important that Australian companies are aware of the potential for these opportunities to arise, so that they are able to respond strategically when they do.
It is equally important that Australian companies remain aware of the caveats that surround this optimistic scenario. India has profited significantly from the reformist approach of its recent governments. The current leadership is likewise reformist in orientation, but the tasks – both practical and political – which confront it in maintaining the momentum of reform remain huge. This report has deliberately focused on the implications of India pursuing its current growth trajectory successfully. But, as numerous studies make clear, this is by no means the only possibility. In considering the potential for opportunities to arise in India, Australian companies need also to be fully cognisant of the hurdles that remain to be overcome.
P A G E INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
THE IMPORTANCE OF SERVICES
The strength and importance of India’s services sector distinguish it from Asia’s other developing countries (Figure 1.1). Typically, service industries develop on a large scale after agriculture and manufacturing have reached a certain stage of development. Generally, as development proceeds, agriculture’s share in national output contracts and a parallel expansion of industry takes place, initially centred on labour-intensive production. The share of both industry and services in GDP tends to increase as per capita incomes rise and the economy progresses from low to lower-middle income status. As the economy moves to upper-middle income levels, services’ share tends to grow more rapidly, while industry’s share plateaus or declines.
F i g u r e 1 . 1 India’s ‘X’ factor: a dominant and growing services sector Services as a proportion of GDP (five year averages) and 2004 per capita GDP in selected Asian economies
India’s services sector is larger and growing faster than that of economies with higher 70 per capita GDP 1985–89 16000 1990–94 60 1995–99 14000 2000–04 2004 per capita GDP 12000 50 10000 40 8000
30 Current USD
Per cent of GDP 6000 20 4000
10 2000
0 0 Vietnam India Indonesia China Thailand Malaysia Republic of Korea
Notes: Services to GDP data are at constant 1990 prices in US dollars. 2004 services to GDP data for Thailand and Malaysia are not available. Pre 1999–2000 services to GDP data for India are 1993–94 price data, which have been melded to available 1999–2000 price data. Sources: United Nations Statistics Division 2006 for services to GDP data; Indian CSO 2006 for 1999–2000 to 2004–05 services to GDP data on India; RBI 2005b, Table 3 for pre-1999–2000 services to GDP data on India. IMF World Economic Outlook Database 2006 for 2004 per capita GDP data.
In this report construction is included as part of the services sector. This is consistent with the WTO General Agreement on Trade in Services (GATS), which includes construction and related engineering services as one of 12 major services sectors. The other major sectors are business services, communication services, distribution services, educational services, environmental services, financial services, health related and social services, tourism and travel related services, recreational, cultural and sporting services, transport services and other services not included elsewhere.
P A G E Servces and India’s Rise
India’s manufacturing sector is biased towards capital-intensive production. It has remained largely static at around 20 per cent of the economy and, while its growth is accelerating, has not thus far benefited appreciably from strong growth in exports due to the trend to integrated international production systems (see Chapter 2). In this respect, India appears more typical of a middle-income developing economy than a low-income economy.
The upward trend in services’ share of Indian GDP has accelerated since the major economic reforms initiated in 1991. In 1970–71, it stood at just 39 per cent. By 1990–91, it was 48 per cent. By 2005–06, services’ share of GDP had risen to 60.7 per cent (Figure 1.2).
F i g u r e 1 . 2 Services sector gaining ground Sector shares in GDP (at factor cost and 1999–2000 prices), in per cent, 1990–91 to 2005–06
100
80
60
40 Per cent of GDP
20
0 1990–91 2000–01 2003–04 1993–94 1997–98 2001–02 1991–92 1992–93 1994–95 1995–96 1996–97 1998–99 1999–00 2004–05 2005–06 2002–03
Services Industry Agriculture
Notes: Pre 1999–2000 data are 1993–94 price data, which have been melded to available 1999–2000 price data. Sources: PIB 2006 for 2005–06 data; Indian CSO 2006 for 1999–2000 to 2004–05 data; RBI 2005b, Table 3 for pre-1999–2000 data.
Over the period 1991–92 to 2005–06, the services sector grew at a trend rate of 7.9 per cent, compared with just 2.6 per cent for agriculture, 6.1 per cent for industry and 6.1 per cent for the economy overall. It contributed 70 per cent of overall GDP growth over the period. Between 1980–2004, productivity grew most rapidly in services, in contrast to the general pattern observed in other countries where productivity growth was stronger in manufacturing and agriculture (IMF 2006).
Throughout the report, Indian fiscal year data are for the April – March fiscal year.
P A G E INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
Growth in services likewise exceeded overall growth in the economy over 2002–03 to 2005–06, the first four years of the tenth Five Year Plan (2002–07). The sector recorded a robust 9.1 per cent average growth, while total GDP grew at 7.0 per cent, somewhat short of the eight per cent target set in the Plan. Services may be even more important and growing somewhat faster than the official data would suggest (Box 1.1).
BOX 1.1: measurement of services in the national accounts
Services contributed 59.7 per cent of GDP in 2004–05 according to GDP data at 1999–2000 prices – compared with 57.6 per cent based on the earlier 1993–94 price data. Weightings used to calculate 1999–2000 price estimates may not reflect activity weightings that would be more appropriate today, given the fast-changing nature of some services sectors. Moreover the official data do not capture all economic activity equally well. GDP estimates forthe ‘unorganised’ segments (as defined in Box 2.6) of manufacturing and services, as well as for some segments of private organised services sectors, are compiled through indirect methods, using indicators to extrapolate benchmark GDP estimates in a base year (Indian CSO 2006). Under-reporting of incomes may also take place in some sectors.
Growth is not, however, uniform across India’s services sector. Certain services stand out in terms of their role in driving economic growth. Building on India’s large pool of engineering talent and its rapidly expanding telecommunications sector, IT–ITES have in recent years been the key catalyst of growth. Their success has come largely through rapid expansion of exports tapping into burgeoning world-wide demand, as investment and rapid advancements in telecommunications infrastructure and information technology enable an increasing array of activities to be performed remotely. Faced with relatively low levels of regulation, IT–ITES and other fast-growing high-end services such as telecommunications have now reached a size where they are significant contributors to GDP growth.
Growth and improved efficiencies in other key areas, such as financial services, transportation and transport infrastructure, are vital to facilitating expansion of other sectors of the economy. This could in turn help ensure that development is more broadly based across both regions and socio-economic groups – and therefore sustainable. Deregulation and foreign investment in such facilitating services drive improved performance within those sectors and bring significant competitiveness benefits to the wider economy given their importance as inputs to other sectors. While reform is proceeding in these areas, much remains to be done. And other sectors which potentially have a critical role to play in improving overall productivity have lagged far behind growth in the economy as a whole.
P A G E Servces and India’s Rise
Drivers of services sector growth
‘The aphorism “In a desert one should find camels not hippopotamuses” is a good guide to analyzing the pattern of economic growth. If rain is scarce, then one should find animals adapted to a scarcity of water, not those reliant on water. In an economic environment where, say, transport infrastructure is scarce, one should find “infrastructure camels” – those industries and firms that are thriving should be less than usually reliant on infrastructure.’
(World Bank 2006a)
Strong growth in foreign demand; deregulation, liberalisation of foreign investment and greater private sector participation since 1991; increased industry outsourcing; and high income elasticity of demand for services have been among the key factors driving high growth in India’s services sector (Gordon and Gupta 2004). These factors are examined further below. However some other important influences should be noted, consistent with the comment from the World Bank cited above.
Services tend to be less dependent on large-scale investments, and so less subject to investment‑related regulatory hurdles (Indian Planning Commission 2002a). Compared with the manufacturing sector, gross product in services sectors (outside of community, social and personal services) is more concentrated in the largely unregulated ‘unorganised’ sector (as defined in Box 2.6). Transport infrastructure shortcomings also tend to have a lesser bearing on most services sectors. The IT–ITES sector in particular has benefited from a supportive policy approach. A large, relatively low cost, and well-educated workforce, which contains more English-speakers than the United States and Britain combined (Chapter 5), has enabled India to capitalise on burgeoning export opportunities in high‑end services.
Booming services trade India’s services trade has grown at a phenomenal rate in recent times reflecting strong growth in foreign demand, particularly for IT–ITES. Exports grew at a trend annual growth rate of 20 per cent over the ten years to 2004–05. In 2005–06 they were valued at US$60.6 billion, up over 40 per cent on their 2004–05 value (RBI 2006a). Around 85 per cent of the growth in services exports in 2005–06 was attributable to growth in commercial services excluding transportation and travel (RBI 2006a).
Services imports have demonstrated a similar pattern of strong growth, reflecting the two-way nature of trade opportunities generated by growth in the commercial services sector. Between 2003–04 and 2005–06, total services imports more than doubled to US$38.3 billion (RBI 2006a). Imports of commercial services excluding transportation and travel accounted for some 60 per cent of the total growth in services imports in 2005–06 (RBI 2006a).
Technological developments have been the key enabler of the explosion in commercial services trade. Specifically, investment and rapid technological advancements in telecommunications and information technology are driving reductions to the cost of digitising, transmitting and processing information, thereby enabling an ever increasing number of services to be undertaken remotely by specialist
P A G E INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
providers. In particular, the dotcom bust of 2000, which left a global network of broadband on the market from failed telecommunications companies that was subsequently snapped up for a fraction of its cost, drastically reduced the cost of broadband communications (Friedman 2005). India, with its large cohort of engineering graduates and the widespread English language skills of its population, has been a particular beneficiary of this services tradability revolution (Box 1.2).
BOX 1.2: rethinking the haircut – India and the Services tradability revolution
Traditionally, economists have tended to think of services either as ‘tradable’ or ‘non-tradable’. The haircut, which requires the deliverer of the service (the hairdresser) to be physically located next to the recipient, has often been regarded as the archetypal ‘non-tradable’ service.
But companies are re-examining their approach to service delivery as advances in information technology, and in telecommunications have enabled packages of digitised information to be moved around the globe almost instantaneously. Fundamental changes are occurring in the way service activities are undertaken and delivered worldwide.
In Bangalore, for example, there is a hairdressing shop where the appointment commences with the customer sitting while her head is photographed from many different angles. The digitised images are then processed so as to produce an accurate representation of the customer’s scalp, without hair, which is transmitted to a designer in a remote location. The designer produces and transmits back to the shop a range of suggested hairstyles, from which the customer can then choose.
By ‘unbundling’ the hairdressing service in this way, the hairdressing shop is able both to increase its efficiency and provide a better service. The customer potentially has access to a top international designer and a range of possible new hairstyle choices; and the hairdresser and designer can focus on their respective specialised skills, maximising the value added by each. All of a sudden, the haircut – or part of it – has become a tradable service.
This rather elaborate approach to hairdressing may never become widespread. But it is indicative of the entrepreneurialism being applied in India to exploiting its competitive advantage in IT Enabled Services. As the graph on the left of the next page shows, the overall outcome has been a dramatic increase in India’s exports of commercial services excluding transportation and travel. But as the graph on the right demonstrates, India’s commercial services imports have experienced similar meteoric growth, as the ‘tradability revolution’ results in rapidly increasing trade in services.
Based on discussions in May 2006 with Professor S. Sadagopan, Director, International Institute of Information Technology, Bangalore.
P A G E Servces and India’s Rise
BOX 1.2 (Continued)
Booming two-way trade in commercial services India’s services trade (US$ billion)
70 45 Exports Imports 60 40
35 50 30 40 25
30 20 US$ billion US$ billion 15 20 10 10 5
0 0 1996–97 2000–01 1996–97 2000–01 1995–96 1995–96 1998–99 2001–02 2002–03 2003–04 1998–99 2001–02 2002–03 2003–04 1997–98 1999–00 2005–06 1997–98 1999–00 2005–06 2004–05 2004–05
Commercial services excluding travel Commercial services excluding travel and transportation and transportation Total services Total services
Note: 2005–06 data are provisional. Sources: RBI 2006a for 1999–2000 to 2005–06 data; RBI 2005b, Table 146 for pre 1999–2000 data.
Foreign Investment and deregulation Liberalisation of foreign direct investment (FDI) regimes worldwide has enabled service providers to establish a commercial presence in host countries, which can be critical for the delivery of services (UNCTAD 2004). Reflecting the strong international demand for services in which India enjoys a comparative advantage, FDI in India’s services has grown strongly. The stock of FDI in India’s services sector grew at a compound annual rate of 36 per cent between 1992–93 and 2001–02, compared with 20 per cent in other sectors (World Bank 2004). Close to one-half of total FDI inflows between 2002–03 and 2005–06 were directed to services (RBI 2005d, 2006b). Business and computer services and the finance and insurance sectors have been the main targets (Figure 1.4). Not surprisingly these are sectors that either have not been subject to significant amounts of regulation or have been deregulated and opened to competition since 1991.
The official data may underestimate the level of foreign investment in services, owing to the difficulties of measuring investment in the sector. According to data from the Indian Department of Industrial Policy and Promotion (DIPP), the telecommunications sector has also attracted significant inflows of FDI.
P A G E INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
F i g u r e 1 . 3 Growing services FDI is concentrated in a few key sectors Industry breakdown of FDI inflows in Indian services, 2002–03 to 2005–06
900 Computer services Finance, insurance, real estate 800 and business services Construction 700 Transport Health and medical services 600 Trade, hotels and restaurants Other services 500
400
US$ million 300
200
100
0 2002–03 2003–04 2004–05 2005–06
Sources: RBI 2005d, Table 1.71; RBI 2006b, Table 1.76.
The fast growing Indian services market offers considerable potential for foreign investors, although continuing restrictions on foreign equity holdings in some sectors and other constraints and impediments to business have a restraining effect.
Increased industry outsourcing of services Indian industry has increasingly sought to contract out an array of services previously produced in house (Gordon and Gupta 2004), such as software development, design and testing, back-office functions and post-sales service. Industry’s increased reliance on services inputs in turn appears to be having a marked effect on increasing manufacturing output. Services inputs contributed around 25 per cent of total output growth in India’s organised manufacturing sector in the 1990s, up from just one per cent in the 1980s (Banga and Goldar 2004). The trade reforms of the 1990s were a significant factor behind manufacturing industries’ greater reliance on services inputs, as firms appeared increasingly to look to services inputs to meet intensifying competition precipitated by the reforms (Banga and Goldar 2004).
Increased private consumption of services High levels of domestic consumption are fuelling growth in both the services sector and the broader Indian economy (Das 2006). Private consumption expenditure accounts for 64 per cent of India’s GDP – more than in Europe (58 per cent), Japan (55 per cent) and China (42 per cent)
Gordon and Gupta (2004) find empirical evidence of industry’s increased resource to contract out services over the 1980s and early 1990s.
P A G E 10 Servces and India’s Rise
(The Economist 2006b). Services’ share in private final consumption expenditure almost tripled to 29 per cent over the 50 years to 2000–01 (Hansda 2001). Services were prominent among the segments of private consumption expenditure that grew at annual rates of above 15 per cent over the decade to 2003 (Ernst & Young 2005a). The segments recording strong growth included hotels and restaurants, medical care and health services, transport, communication, and education. Consumption expenditure on movies and theatres and vacations each increased by around 30 per cent in 2003 (KSA Technopak Consumer Outlook 2004, cited in IBEF 2005c). Growing affluence and a rapidly increasing middle class (Box 1.3) have helped power growth over more recent years.
BOX 1.3: An increasingly affluent middle class
India has a large and growing consumer class. India’s National Council of Applied Economic Research (NCAER) estimates that in 2001–02 there were some 53 million households (comprising around 280 million people) with annual incomes of Rs90 000 (US$1900) or more. There were almost 11 million households with incomes of Rs200 000–1million (US$4200–21 000). Bearing in mind the relatively low cost of many goods and services in developing countries and rising per capita incomes, the number of households able to afford an increasing range and quality of services is clearly growing rapidly. By 2009–10, NCAER estimates the number of households with annual incomes of Rs90 000 or more will have increased to 108 million – double the number in 2001–02 and treble that in 1995–96 – while the number of households with incomes of Rs200 000–500 000 could exceed 28 million.
India’s growing middle class
Classification of households by income class (Rs ’000 pa)
250
200
150
100
50 Number of households (millions)
0 1995–96 2001–02 2005–06 * 2009–10 *
Deprived (<90) Aspirers (90–200) Strivers (200–1000) Well-off (1000–10 000)
Source: NCAER. * Projection
P A G E 11 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
The way forward
Bullish forecasts for long-term economic growth in India vis-à-vis all other major economies are principally premised on projections of its labour force growing beyond 2050 (unlike China’s, Brazil’s or Russia’s), and its capacity to increase productivity dramatically through technological ‘catch-up with the West from a lower base level than China and other large developing economies (Goldman Sachs 2003, PricewaterhouseCoopers 2006).
But the key question for India is whether the services-led growth that has, to date, mainly been driven by very rapid expansion of what remains a relatively small part of the economy – particularly in employment terms – can feed into broader economic development, sufficient to raise the living standards of all Indians, and not just a relatively small, educated elite.
It is arguable that rapid expansion in knowledge-intensive services exports could continue to be a catalyst for India’s economic growth. India’s increasingly outward orientation is facilitating a more efficient allocation of resources according to the country’s comparative advantage in the production of knowledge-intensive services. This specialisation, to serve a global market, can provide greater opportunities for economies of scale, and therefore higher returns. Exporting is an efficient means of introducing new technologies and gaining exposure to leading-edge production and marketing techniques, both to India’s services exporters and to the broader economy (ADB 2005). Growth in services exports encourages savings and capital accumulation; generates the foreign exchange needed to procure capital goods, oil and other resources; and, by increasing the supply potential of the economy, raises India’s capacity to import.
Perhaps most importantly in the context of India’s services-driven development model, export-led growth facilitates an expansion of aggregate demand (ADB 2005). The income generated by India’s knowledge-intensive services feeds into increased domestic demand in two ways (conceptualised in Figure 1.4). First, the companies generating international revenue drive a rapid expansion of demand for production inputs and facilities (including physical infrastructure and services such as education and training). Second, there are income multiplier effects. The rising incomes and expectations of those working in the boom industries helps fuel consumer demand.
If sustained, the growth of these high-end services should create pressure for expanded output from the industries required to facilitate ongoing expansion at the next level, such as telecommunications, financial services, education services, and more traditional services such as transport and construction, while rising consumer demand is likely to drive growth in retail trade, hotels and restaurants and other tourism-related services, as well as manufacturing and agriculture. Pressure for expanded output in those sectors would intensify further if India’s relatively capital-intensive manufacturing sector – which has begun to record growth rates in the vicinity of ten per cent – continues to perform strongly, particularly given that manufacturing is widely considered to have a substantial multiplier effect on job creation in services.
P A G E 12 Servces and India’s Rise
Pressure for expanded output and rising consumer demand, in turn, could create pressure for increased capabilities and productivity growth in the sectors outlined above. At that point reform, investment and modernisation could occur, or constraints on the ongoing expansion of the fast-growing sectors might emerge. Recent scenario work by the World Economic Forum and the Confederation of Indian Industry (WEF 2005) emphasises the risks for broader growth in the medium to longer term if reforms do not proceed.
If reform and modernisation do occur, a further feedback to the IT–ITES sector could well develop as reforming sectors draw on India’s expertise in IT–ITES to make their own operations more productive – for example, implementing modern logistics systems or computerised manufacturing systems or outsourcing basic business processes. Over time this should make growth in the Indian economy less dependent on external demand, and therefore less vulnerable to slowdown in industrial country markets.
Some of these processes are already evident. IT, financial services and telecommunication services are already vital inputs to the manufacturing sector. Manufacturing’s competitiveness is being enhanced by the increasing tendency to contract out a range of services (see Chapter 2). Fast-growing services are also providing increasing business for other sectors. Knowledge-intensive services support innovation, productivity growth and technological improvements in other sectors. Moreover, it is apparent that the IT–ITES sector – and in particular its principal representative organisation, the National Association of Software and Service Companies (NASSCOM) – is an active and empowered advocate for ongoing reform in the Indian economy.
F i g u r e 1 . 4
How services could lead to broad-based development
International demand for IT–ITES and other high-end services
New products Export growth
Investment in Increased increased capacity revenue
Higher salaries in IT sector
Demand for construction, Increased domestic demand for IT–ITES infrastructure, and and other high-end services human resources Higher personal consumption
Productivity-enhancing reforms
Pressure to Pressure on retail, improve delivery of manufacturing, infrastructure, human agriculture, etc to resource development increase output
P A G E 13 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
The services tradability revolution; the increasing sophistication, technology-driven nature and scale of a growing range of Indian services; and strong and growing inter-sectoral linkages, point to the possibility of India’s services-led development being a viable alternative to the path followed by other rapidly developing Asian economies. The robustness of productivity growth in India’s services sector through the 1990s of around 5.6 per cent per annum was in some senses reminiscent of China’s experience in manufacturing over the 1984–93 period, relative to overall productivity growth in the respective economies (UNCTAD 2005b). At the same time it is clear that manufacturing also has an important role to play in broadening the base of growth and absorbing India’s labour force (see Chapter 2), a fact of which Indian policy-makers are fully cognisant.
Implications
The above characterisation of the broad role services might play in the development of the Indian economy would give rise to a number of implications:
• For India’s current development path to be sustainable, it will be important for other sectors to provide an environment in which the ongoing growth of high-end services can be maintained. – This will necessitate expansion in sectors (such as construction, telecommunications, transport and power infrastructure, financial services, professional services and education and training) that supply inputs for IT–ITES and other leading-edge services. – A significant ongoing commitment to regulatory reform and market opening in these sectors – including reform of foreign investment regulations – will in turn be required to ensure that constraints on growth do not emerge. – If the reform effort falters, longer-term economic growth prospects could be placed at risk. However the dynamics of the system mean there are likely to be strong positive pressures in favour of reform.
• Reform to date in different services sub-sectors has been variable, so that change in some of these is likely to be rapid, with economic growth continuing to generate pressure for productivity improvements. – Such change will give rise to large-scale requirements for skills and capabilities that may not currently be available in sufficient quantities in India. – There are, therefore, grounds to expect opportunities to arise for foreign services providers.
• Australian companies could benefit from maintaining a strategic understanding of these developments when considering whether to venture into the Indian market.
Productivity in the services sector is difficult to measure.
P A G E 14 C h a p t e r 2
THE role of services in developmentI
KEY POINTS
• While high-end services are a key driver of economic growth, other services have a critical role to play.
• Broadly speaking, the services driving economic growth in India have either not been subject to significant amounts of regulation (notably IT–ITES) or have been deregulated and opened to competition (most prominently, telecommunications).
• Growth in high-end services like IT–ITES has the potential to generate significant spin-offs, including productivity growth in other services and in agriculture; technological improvements in manufacturing; and the emergence of a large consumer base with the discretionary spending power to spur demand and employment growth in key labour-intensive sectors.
• Financial services and transport infrastructure can be expected to face further pressure to expand capabilities and improve productivity through reform if these sectors are to play their critical role in facilitating economic expansion.
• The services sector has a major role to play in absorbing India’s rapidly growing labour force.
– Retail and wholesale trade and housing and construction in particular have the potential to employ large numbers of less skilled workers.
• Restrictive labour laws and a raft of other regulations provide a strong disincentive to small Indian companies growing above a certain size, and prevent modernisation and inhibit productivity growth in a number of sectors, including retail, logistics, and legal and accountancy services.
• Improvements in the delivery of education and healthcare services, particularly in rural areas, are vital for sustainable growth.
• Services sector developments are facilitating modernisation in India’s relatively capital-intensive manufacturing industries and in agriculture, and services inputs should enable India to derive maximum benefit from mineral exploitation once an investment-friendly platform is established for the mining sector.
P A G E 15 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
‘Of the 40 million-plus jobs created since 1965 in the [US] economy, high technology did not contribute more than 5 or 6 million. High tech thus contributed no more than ‘smokestack’ lost… Where did all the jobs come from? Everywhere and nowhere.’
(Peter Drucker, Innovation and Entrepreneurship)
The description of the possible role of services in driving India’s economic growth in Chapter 1 highlights that services sub-sectors at different stages of deregulation and reform are likely to have differing roles to play in generating economic growth.
As noted in Chapter 1, IT–ITES and other high-end services are already having a significant positive impact on growth in the broader Indian economy. Growth in these services has the potential to drive higher incomes among the growing middle class of consumers. This in turn would generate demand that could be a catalyst for growth in other more labour-intensive areas of the economy. It also has the potential to spur reform and productivity improvements in other key services sectors, as they increasingly draw on high-end services as inputs. Moreover high-end services can provide the technology to enable Indian manufacturing to move rapidly up the value chain, possibly leapfrogging similar industries in key competitor countries.
Other services sectors are critical to the health of the Indian economy. Deregulation and improved efficiencies in financial services, transportation and transport infrastructure are driving improved performance within these sectors and also facilitating expansion in other areas of the economy. Developments in these key sectors can help ensure that development is more broadly based, across regions and socio-economic groups.
Services sectors with high employment potential – including retail and wholesale trade, hotels and restaurants, and housing and construction – will need to expand significantly in response to increased demand stemming from growing consumer affluence. Demand for manufactured products is also likely to increase. For these sectors to meet the increased demand there is likely to be a need for reforms directed at easing the impact of the dual economy, in which heavy regulation discourages small companies from growing above a certain size. Such reforms could significantly improve productivity in the economy.
These relatively labour-intensive services are likely to have a crucial role to play if India is to absorb its rapidly growing labour force. But as the above quote by Drucker highlights, in a dynamic and growing economy where entrepreneurialism is flourishing, significant numbers of jobs can emerge, often in unexpected areas of the economy. Improvements in the delivery of public healthcare and education services, particularly in rural areas, will be critical to promoting more even – and politically sustainable – economic development.
In general, India’s more liberalised services have grown faster. Growth rates are also strongly and positively correlated with levels of FDI in services sub-sectors (World Bank 2004). While economic liberalisation can lead to adjustment costs, the sectors which have been subject to the greatest liberalisation have tended to experience higher employment growth than those which have only been
P A G E 16 Role of Services in Development
partially liberalised or remain closed. Continued liberalisation therefore appears to be both critical to future growth and potentially welfare-enhancing, particularly in those sectors which primarily employ skilled professionals, such as legal and accountancy services, where policy makers need not be so concerned over the risk of displacement of large numbers of relatively poor and low-skilled workers (World Bank 2004). The efficient functioning of some sectors nonetheless demands oversight from an independent and effective regulator, especially where service providers utilise and/or rely on public infrastructure – as is usually the case in telecommunications. With the economy currently growing strongly, the Government is arguably in a good position to be taking some of the harder reform decisions.
This chapter examines the role of the services sectors critical to the Indian economy’s ongoing expansion, noting some of the key areas where reform has already taken place, and where further reform is planned. These sectors are categorised as follows:
• the ‘drivers’ – high-end services such as IT–ITES and telecommunications, which are relatively lightly regulated or significantly deregulated, and whose growth has already had a significant impact on the economy’s strong performance;
• ’contributors’ such as financial services and transport infrastructure, where reform has been happening but more remains to be done;
• the ’slower reformers’ such as retail and legal and accounting services, which remain relatively closed; and
• ’sectors vital to broad-based development’ – education and healthcare.
The final section of the chapter considers the interrelationship between services sector developments, and modernisation and job creation in manufacturing, agriculture and mining.
THE DRIVERS
‘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
IT–ITES – the star performer The rapid expansion of Information Technology–Information Technology Enabled Services (IT–ITES) has had a significant impact on the broader Indian economy, by generating substantial export earnings and tax revenue; creating significant numbers of high-quality jobs; and precipitating productivity-enhancing technology diffusion to other industries and the public sector. Despite facing some challenges, IT–ITES looks set to remain a key driver of economic development in India, both as a high-growth and employment-generating sector in its own right, and through its linkages with other sectors.
P A G E 17 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
The dramatic growth in IT–ITES has been driven principally by fast-growing international demand for Indian IT services and software and by burgeoning business process outsourcing to India. India’s IT industry took off in the late 1990s, when the global IT industry was unable to meet the exponential growth in demand for IT services precipitated by Y2K compliance concerns. It has since benefited from rapid reductions in the cost of digitising, transmitting and processing information (Friedman 2005). The government’s light-handed approach to regulation in the sector, combined with a supportive policy environment (Box 2.1), has played a particularly important role in facilitating its growth. IT–ITES’ expansion has been underpinned by a number of strengths, including India’s large pool of qualified professionals, its widespread use of English, its rapidly increasing stable of world-class companies, and cost advantage over other locations.
In addition to being far and away the largest exporter of ITES-business process outsourcing (ITES‑BPO) services, India is a major exporter of IT services and software. IT services and software exports accounted for nearly two-thirds of total IT–ITES exports in 2004–05. ITES-BPO exports accounted for nearly 30 per cent of the total in that year (Box 2.2) and have been growing rapidly, as companies offshore service functions to affiliated Indian businesses (‘captive’ units) – which continue to dominate the segment – or outsource services to independent/third party BPO vendors (NASSCOM 2005a).
The ITES-BPO segment was initially dominated by call centres and the undertaking of ‘back-office’ functions. More recently there has been a shift towards the provision of higher value knowledge and analytic-based processes as capabilities have improved. India is emerging as a prominent player in a number of these segments, and is at the same time helping to re-define which services components are tradable. India is fast gaining strength in legal services (for example, legal research, drafting contracts); engineering R&D; medical services (for example, diagnostic services, telemedicine); education and training (for example, tutorial services using Voice over Internet Protocol, curriculum design); software product development; market research; and data analytics (PricewaterhouseCoopers 2005b). The Indian operations of multinational enterprises continue to dominate the ITES-BPO segment (NASSCOM 2005a).
Primarily data entry and processing, administration services and general accounting functions.
P A G E 18 Role of Services in Development
BOX 2.1: the role of policy in promoting the software sector
The Indian software industry took off largely in response to Y2K-driven demand for IT services. But policy measures introduced by the central government to bolster the position of the software sector arguably contributed significantly to India’s ability to exploit this opportunity. These included*:
• A 1984 Computer Policy recognised software as an ‘industry’, making it eligible for an investment allowance and other incentives. Import duties on software and personal computers were also lowered. Firms became eligible for concessional import duties on computers if they exported software.
• In 1986, import of software in any form was permitted and the sector was opened to foreign investment.
• The Software Technology Parks (STP) scheme was introduced in the early 1990s, modelled after Silicon Valley in USA. STPs are special zones, akin to Export Processing Zones, provisioned with appropriate communication and physical infrastructure and designated for export-oriented activities. Firms in STPs benefit from tax holidays up to 2010 and duty free equipment imports. FDI with 100 per cent foreign equity is permitted. By July 2004, there were 40 parks set up under the scheme (WTO 2005). The most famous STPs are located in Bangalore and Hyderabad. They have prospered and become a highlight of the ICT landscape in India.
• In 1997, all import duties on software were eliminated and software firms were permitted to invest overseas.
• A National Task Force, established in 1998, developed an Information Technology Action Plan containing a large number of recommendations aimed at addressing the inadequacy of telecommunications and other infrastructure, and the regulatory impediments faced by the sector. The government accepted the plan’s recommendations.
• In 1998–99, the software sector was included amongst the list of ‘priority sectors’ to which the banks are subject to directed lending.
State governments have also played a role in promoting the sector. For example, Andhra Pradesh’s efforts to attract technology investment and promote the use of IT in government agencies in the second half of the 1990s triggered competition from other states. Some states have also been more willing to modify labour laws as they apply to the IT sector, notably through enabling 24/7 working arrangements.
* see Saxenian (2000) for more detail on a number of these measures.
P A G E 19 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
BOX 2.2: THE SUCCESS OF INDIA’S IT SECTOR
By any standard, India’s IT sector has enjoyed remarkable success. Revenues of the sector grew more than five-fold in the space of six years to reach an expected US$28.2 billion in 2004–05 (NASSCOM 2005a). IT services and software is the largest segment (US$16.5 billion), followed by ITES-BPO (US$5.7 billion) and hardware (US$6 billion). According to NASSCOM, the sector’s share of GDP grew from just 1.2 per cent to 4.1 per cent, which would place it ahead of the communications sector. Total IT–ITES revenues (i.e. excluding the hardware segment) increased by a further 30 per cent in 2005–06 to US$29.5 billion and are expected to reach US$36–38 billion in 2006–07. IT–ITES’ share of GDP is projected to increase to 4.8 per cent in 2006–07 (NASSCOM 2006b, 2006c). While IT services and software revenues have been contributing more to growth in total IT–ITES revenues, ITES-BPO revenues increased ten-fold over the five years to 2004–05.
‘Software services’ (predominantly IT–ITES) exports have grown at a compound annual rate of around 35 per cent over the past six years. In 2005–06, they were valued at US$23.9 billion, comprising US$23.4 billion in IT–ITES, and US$0.5 billion in hardware. Large companies dominate the export profile, with the top ten companies accounting for 60 per cent of total computer services exports in 2002–03 (RBI 2005c). India’s share in global IT software and services (including ITES-BPO) spending was 2.3 per cent in 2004–05, and an estimated 2.8 per cent in 2005–06 (Indian Ministry of Finance 2006).
Includes revenues derived by overseas subsidiaries of Indian IT companies. NASSCOM’s calculation seems inflated, as it would appear to be based on sector revenues, not value added, as a share of GDP. According to the Indian CSO, which bases its figures for the organised sector on NASSCOM revenue data and a value added ratio estimated from an analysis of annual reports of a few software companies, the Computer and related activities sector’s gross value added in 1999–2000 was Rs172 billion (US$4.0 billion), or 0.96 per cent of GDP, as compared with the communication sector’s 1.6 per cent share of GDP. This includes an estimated Rs25.7 billion of gross value added in the unorganised sector (Indian CSO 2006). This compares with organised IT–ITES sector (excluding hardware) revenues of Rs251 billion (US$5.8 billion), which is equivalent to 1.4 per cent of GDP for that year. There has been some contention as to the accuracy of Indian data, which tend to suggest a far higher level of exports than do counterpart import data, most notably for the United States (see US Government Accountability Office 2005, and WTO 2005). This would appear to reflect the fact that the Indian data include revenues derived from all four modes of supply as identified by the WTO General Agreement on Trade in Services, not just conventional cross-border supply (Mode 1). The discrepancy is apparent from a comprehensive survey of computer services companies for the year 2002–03 conducted by the RBI (RBI 2005c). Conventional cross-border supply (Mode 1) accounted for almost 40 per cent of the US$6.4 billion, while individuals temporarily abroad to supply a service (Mode 4) accounted for 13 per cent. Almost 50 per cent were derived from the supply of services by the overseas subsidiaries of Indian companies (Mode 3). Computer services exports differ from total IT–ITES exports in that they exclude exports of companies engaged exclusively in business process outsourcing activities.
P A G E 20 Role of Services in Development
BOX 2.2 (Continued)
The IT export boom
IT–ITES export revenues
25
IT services and software exports
20 ITES-BPO exports Hardware exports
15 US$ billion 10
5
0 1999–00 2000–01 2001–02 2002–03 2003–04 2004–05 2005–06
Note: The 2005–06 figure for IT services and software exports includes ITES-BPO (split of exports between IT services and software, and ITES-BPO was not available for 2005–06). Source: NASSCOM 2005a and 2006b.
Despite being heavily export-oriented, the Indian IT sector is having a significant and growing impact on the local economy. Revenues from domestic business grew at a 19 per cent compound annual rate over the five years to 2004–05, with IT services and software accounting for roughly 40 per cent of revenues and hardware for 50 per cent. While most small Indian businesses cannot at this point afford IT services, IT is beginning to be used in a major way in manufacturing and in the automotive, banking and telecommunication sectors, enhancing the competitiveness of these industries. High‑end services can also provide solutions to issues in other key services sectors, the development of which will be essential to ongoing economic growth.
IT and online information provision and service delivery has been adopted rapidly by both the central and state governments. This is leading to streamlined and more efficient government service delivery and approvals processes, and also adding transparency to procedures and decision making. The growth in IT–ITES has also had a significant impact on the domestic economy as a result of technology diffusion.
Relatively speaking, IT–ITES is not a major direct employer within the economy as a whole. In 2004–05, total direct employment was estimated at just over one million, comprising 697 000 professionals in the software segment – half of whom are involved in software exports with most of the remainder being in-house staff – and a further 348 000 in the ITES-BPO segment. Most direct employment is of skilled workers in larger cities such as Bangalore, Hyderabad and Delhi.
P A G E 21 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
The numbers directly employed are nonetheless increasing rapidly. ITES-BPO employment numbers almost doubled between 2002–03 and 2004–05. Total direct employment in IT–ITES is projected to increase to 1.3 million in 2005–06 – over a million more in the six years since 1999–2000 (NASSCOM 2006a, 2006b). TCS, Wipro and Infosys collectively are expected to hire some 50 000 engineering graduates in 2006–07 and the rest of the IT sector another 30 000. The ITES‑BPO sector will probably increase by 120 000–130 000.
The IT industry also generates significant numbers of jobs in other industries through inter-sectoral linkages, especially in construction, but also in transport and retail. By one estimate, an additional 2½–3 million mainly low-skilled workers are employed indirectly by the IT industry.
Opportunities are emerging for IT sector employment in smaller cities and towns as the supply of skilled workers in the major IT centres comes under pressure. Furthermore, a number of IT–ITES activities do not require high skill levels and many can be undertaken remotely. For example, call centre and accounting-related services can be performed by people with at least some level of education from their homes or small shops/businesses as a source or supplementary source of income.
The information technology and telecommunications revolution is showing some promise in assisting India’s rural development, in areas such as distance learning using the Internet; the use of IT to help agriculture at the grass-roots level; and telemedicine (see section on ‘Services and agriculture’ below).
A number of the larger IT companies have established trusts and foundations or otherwise lent their support to community initiatives, including in rural areas. For example, Infosys gives one per cent of its profits to the ‘Infosys Foundation’, which is focused on helping the socially deprived in education and healthcare. In healthcare, for example, the Foundation helps government hospitals, while in education it assists libraries in villages and provides computers to government schools.
The broader economy also benefits from growth in IT–ITES as a result of the tax revenues derived from the sector.
The outlook for India’s IT–ITES sector remains buoyant. Almost all observers anticipate a continuing trend over coming years to increased trade in ITES-BPO services, whether by outsourcing to third parties or by captive units (UNCTAD 2004). To take one example, business process outsourcing of healthcare services to India has the potential to generate US$4.5 billion in revenues by 2008 (IBEF 2004). Nearly 80 per cent of executives from the world’s largest companies plan to locate corporate functions overseas over the coming three years (A.T. Kearney 2005). Global IT spending is forecast to grow at a compound annual growth rate of 7.9 per cent over the period 2004–08, with the ITES-BPO segment growing at over 11 per cent (NASSCOM 2005a). India’s IT–ITES exports are projected to grow at an annual average rate of over 25 per cent through to 2010, to reach US$60 billion (NASSCOM-McKinsey 2005). IT services and software exports are projected to grow
Based on discussions in May 2006 with Professor S. Sadagopan, Director, International Institute of Information Technology, Bangalore. Discussions in May 2006 with: Kiran Karnik, President, NASSCOM.
P A G E 22 Role of Services in Development
at 25 per cent a year to reach US$35 billion, while ITES-BPO exports are projected to grow even more strongly – at 37 per cent – which would take their value to US$60 billion. IT–ITES could be contributing seven per cent of India’s GDP by then, and creating additional direct employment of 1.6 million over the five years to 2010. NASSCOM-McKinsey (2005) estimate it has the potential to provide over 6.5 million indirect jobs.
Buoyant predictions for IT–ITES in India are conditional on the industry addressing some critical issues, notably the potential shortage of IT professionals. While the graduate talent pool for offshore IT and BPO is estimated at 1.8 million (or 28 per cent of the global total), on current trends there could be a shortfall of towards half a million suitably qualified workers by 2010 (NASSCOM-McKinsey 2005). India’s pool of young university graduates is estimated at 14 million, 1.5 times the size of China’s and almost twice that of the United States. 2.5 million graduates are added to the pool every year. However, despite the very high quality of the top Indian tertiary education institutions, only a relatively small percentage of graduates are considered suitable for employment in customer contact positions in multinationals, in large part because many have poor English or strong local accents (McKinsey 2005a). In response to impending labour shortages in some states, some IT companies are setting up or expanding their operations elsewhere. In particular, many are beginning to experience wage pressures and high turnover of engineering professionals. Demand for middle managers is particularly strong but there is a limited supply of people suitably qualified for these positions. McKinsey forecast that demand for young engineers could exceed supply as early as 2008, and even earlier in some regional centres. On the other hand, India has no looming shortage of people suitably qualified in areas outside of IT such as finance and accounting, call centres, and back-office administration (McKinsey 2005a). NASSCOM and a number of commentators (for example, Das 2006) highlight the need for action in the education system (and corporate training) to ensure that India produces enough quality English-speaking graduates. Reflecting these pressures, the major Indian providers are heavy investors in education and training.
The increasingly acute shortage of suitably qualified workers for IT–ITES also affects other industries. India’s IT majors are recruiting engineers at the expense of manufacturing and infrastructure firms. Skills shortages are driving up wages for highly-skilled workers, and in turn beginning to erode the cost advantage that has been critical to the success of India’s IT–ITES. While labour costs remain a fraction of those in developed economies like the United States, wage increases are narrowing India’s cost advantage over other emerging economies (Accenture 2006).
Telecommunications – a dynamic enabler Efficient telecommunications infrastructure generates significant spill-over effects in other sectors of an economy. Modern telecommunications networks facilitate efficient information exchange among economic units and rapid two-way communication, thereby lowering search and transaction costs, aiding the coordination of economic activity on a global scale, and enabling the optimal utilisation of available labour, technology, products and services around the world (Nandi 2002). India’s emergence
P A G E 23 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
and ongoing competitive advantage as a global provider of IT–ITES was (and will continue to be) dependent on the availability of efficient telecommunications infrastructure for electronically transferring and assessing information (Banerjee and Jha 2004).
India’s telecommunications have undergone extensive deregulation and liberalisation (Box 2.3), in large part driven by technological developments and the requirements of the IT sector. Deregulation has helped spur rapid growth and enabled private telecommunications providers to play an increasingly important role. The communications sector grew at an average annual rate of 24 per cent over the five years to 2004–05, increasing its share of GDP from 1.9 per cent to 3.5 per cent. The mobile phone market has grown at extraordinary rates from an initially low base. Over the past five years, the mobile subscriber base posted 85 per cent growth per annum. Private companies achieved annual growth rates in their subscriber base of closer to 200 per cent (Indian Investment Commission 2006a). By December 2005, private sector operators had secured 79 per cent of the mobiles market, while in the fixed-line market they had captured 15 per cent (Indian Ministry of Finance 2006).
As at November 2005, there were 48 million fixed-line subscribers and 71 million mobile subscribers (Indian Investment Commission 2006a). Despite the recent rapid growth, tele-density is still relatively low at around 11 phones per 100 people. Penetration in rural areas is significantly lower still. However, a number of mobile operators have plans to tap into the rapid growth expected in rural areas, which is being spurred by the availability of cheap handsets and a wide array of tariff plans.
Internet usage has increased nearly tenfold since 2000 to reach 50.6 million in 2005, a penetration rate of 4.5 per cent. However the take-up of broadband has been relatively slow. By November 2005, there were about 750 000 broadband subscribers (Indian Ministry of Finance 2006). The Broadband Policy announced in October 2004 had set a target of three million broadband subscribers by December 2005 and 20 million by 2010 (Indian Ministry of Finance 2005).
Increased mobile and Internet access could make a strong contribution to addressing regional inequalities and ensuring more broadly based economic development if it reduces the telecommunications infrastructure divide between urban and rural areas. Access to telecommunications and information technology in rural areas can facilitate the provision of basic services such as medical care; enable better access to financial services and create opportunities for distance learning. Telecommunications networks also act as an electronic highway, reducing asymmetries of access to market information and allowing rural businesses and citizens to participate directly in national and global economies. If for example, Indian farmers can access modern telecommunications and IT to obtain more information about agricultural prices, other markets and economic opportunities, they are more likely to increase productivity and boost their livelihoods (see Box 2.8).
P A G E 24 Role of Services in Development
BOX 2.3: GROWTH-FACILITATING DEREGULATION OF THE TELECOMMUNICATIONS SECTOR
There have been a number of significant milestones in the deregulatory process:
• In 1992, a range of value added services, including cellular phone services and paging services, was opened to private sector competition.
• The National Telecom Policy 1994 set a number of telecommunications penetration targets and opened basic telephone services to the private sector with the objective of bringing about world class telecommunication services and improving the competitiveness of the Indian economy.
• In 1997, an independent telecommunications regulatory authority was established. Its role included setting conditions attached to the licensing of private sector operators, which was previously undertaken by the incumbent Department of Telecommunications.
• In 1999 against the backdrop of revenues falling short of industry expectations and the convergence of the telecom, information technology and media industries, the New Telecom Policy was announced. This introduced a number of reforms aimed at creating a more enabling environment, including in the area of licence fees (Telecom Regulatory Authority of India 1999). NTP 1999 also foreshadowed the opening of the national long distance segment from January 2000.
• In October 2000, the Department of Telecommunications’ operational network was corporatised through the creation of a public company, BSNL.
• In April 2002, international long distance services and Internet telephony were opened to competition. Concurrently, the government sold a strategic stake in VSNL – which at the time was the sole operator in the international long distance market – in favour of the Tata group.
• In 2002 a Universal Service Obligation (USO) Fund mechanism, involving a levy on all telecom operators, was established to mobilise funding for services in remote and rural areas.
• In 2005 the foreign equity limit in telecommunications was raised from 49 to 74 per cent subject to numerous restrictions. Certain conditions apply to ensure the management of service providers remains in Indian hands. Owing in large part to the Indian Government’s concerns over security, foreign carriers are not permitted to use overseas networks to link Indian cities nor to situate control centres outside of India.
P A G E 25 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
Other commercial services The dynamism in India’s IT–ITES and telecommunications sectors is widely recognised. Exports of other commercial services have also grown rapidly, and look set to make an increasingly strong contribution to economic growth. Between 2000–01 and 2004–05 exports of other commercial services (excluding software services) almost quadrupled in value to US$13.8 billion. In 2005–06 exports of these services increased by 64 per cent to US$22.64 billion, to almost rival software services exports (RBI 2006a).
Much of the growth in these exports stems from the ‘miscellaneous other commercial services’ sub‑sector, which comprises approximately 20 professional and other services (Figure 2.1)
F i g u r e 2 . 1 Miscellaneous other commercial services – a strong growth area Breakdown of exports of ‘Other commercial services’ (i.e. excluding transportation and travel)
Insurance services 3% Communication services 11% Software services 64% Construction services 5%
Financial services 3%
Management Other services 37% 3%
2000–01 — US$10.1b Other services 11%
Insurance services Communication 2% services 5%
Software services Construction 51% services 2% Financial services 4%
Management services 8% Other 49%
2005–06 — US$46.2b Other services 28%
Source: RBI 2006a.
P A G E 26 Role of Services in Development
Prominent exports within the miscellaneous other commercial services sub-sector (as detailed in RBI 2006a) include:
• Architectural, engineering and other technical services exports, which reached US$4.64 billion in 2005–06, a 227 per cent increase on the previous year.
• Maintenance of offices abroad exports, which grew by 106 per cent to US$1.49 billion in 2005–06.
• Trade related services exports: US$880 million in 2005–06, a 107 per cent increase on 2004–05.
• Research and development services exports: $US519 million in 2005–06, a 135 per cent increase.
• Merchanting services exports: US$504 million in 2005–06, an 81 per cent increase.
• Advertising / trade fair exports: US$435 million in 2005–06, a 169 percent increase.
• Legal services exports: US$390 million in 2005–06, a 52 per cent increase.
• News agency services exports: US$339 million in 2005–06, a 98 per cent increase.
Other smaller but rapidly expanding growth areas include accounting and auditing services exports (US$138 million in 2005–06, a 393 per cent increase) and operational leasing services exports (US$393 million in 2005–06, a 145 per cent increase).
So-called ‘medical tourism’ has also been a growth sector. A number of technically advanced private Indian hospitals, most visibly the Apollo Group, have been drawing in increasing numbers of patients from Western countries for a range of treatments and operations that can be carried out by highly skilled medical personnel far more cheaply than in their home countries and/or without the delays often experienced under their home country national health systems. Some 150 000 foreigners went to India for treatment in 2004, with numbers increasing by 15 per cent a year. Medical tourism export revenues are projected to reach US$2.3 billion by 2012 (Confederation of Indian Industry and McKinsey in Medical Tourism India 2006). Medical tourism is a key area that has been targeted for expansion by the Indian Government.
Biotechnology is assuming greater significance in the Indian economy, aided by a well-qualified and low cost workforce. Significant numbers of qualified non-resident Indians are now returning to India to take advantage of emerging opportunities. The sector, comprising services and biopharmaceuticals, is growing at annual rates in the order of 40 per cent. Revenues in 2003–04 were around US$700 million, 56 per cent of which derived from exports (IBEF 2005a).
India is the largest producer of films in the world. Film exports have been rising as Indian films gain popularity overseas. Film studios in Hollywood and elsewhere have also outsourced considerable work to India.
P A G E 27 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
the contributors
While leading-edge services have been in the vanguard of India’s economic rejuvenation, they remain a relatively small, albeit growing, part of the overall economy. Their direct contribution to employment is also comparatively low. Banking and transport infrastructure services – which are critical to the health of the broader economy – will need to modernise further and become more productive if the growth currently being exhibited in higher-end services is to be replicated throughout the economy. Several reforms have been introduced in the financial sector, and in roads, ports and air services – but there is scope for more.
Finance – work in progress The financial sector has a very important role to play in the modernisation of India’s economy. It serves as a vehicle for channelling savings to individuals and businesses seeking to borrow funds. The sector therefore plays a vital role in the investment process, which is a major determinant of economic growth. There is strong empirical evidence of a positive relationship between liberalisation and growth in financial sectors (see for example, Francois and Schuknecht 1999 and Mattoo, Rathindran and Subramanian 2001).
India’s banking and insurance sectors have been significantly opened to private sector competition since 1993 and 2000 respectively. Private sector mutual funds were also permitted from 1993. Financial sector reforms and deregulation have triggered strong growth in the sector as financial intermediation has become increasingly important in the economy. Indian stock markets have also come to greater prominence. Measured in terms of the number of transactions, the National Stock Exchange is the third-largest stock exchange in the world after the NASDAQ and the NYSE, while the Bombay Stock Exchange moved into fifth place in 2003 (Indian Ministry of Finance 2006).
Yet much remains to be done. Indian borrowers pay more for capital and depositors receive a lower return than they do in comparable economies, due to the sector’s shortcomings in mobilising savings and allocating capital (Farrell, Lund and Puri 2006). According to one recent estimate published by McKinsey, addressing these shortcomings through an integrated reform program could raise India’s growth rate by close to three percentage points, which would, in turn, increase per capita income by 2014 to more than US$1200 or 30 per cent higher than it would otherwise be (ibid). While such estimates are necessarily speculative to a degree, it is clear further reform would have significant dividends.
Banking The Indian banking system is changing rapidly. Traditionally, it was characterised by poorly- performing public sector banks employing outdated practices and technology. Beginning in the early 1990s, the sector has been gradually liberalised (Box 2.4) but foreign investment remains severely constrained.
P A G E 28 Role of Services in Development
BOX 2.4: GRADUAL LIBERALISATION OF THE BANKING SECTOR
• In January 1993, The Reserve Bank of India issued guidelines under which new private sector banks could be established. Foreign banks were also permitted more liberal entry and have been able to take modest equity positions in existing private sector banks.
• Interest rates were deregulated in stages beginning in the early 1990s.
• Banks have been permitted to invest a greater percentage of their assets outside of cash and government securities and given more freedom in their lending policies. While directed lending requirements have remained in place, the scope of lending deemed as meeting these requirements has been widened (Singh 2005).
• Legislative amendments in 1994 enabled public sector banks to raise capital through public share issues. New guidelines issued in February 2005 provide greater managerial autonomy and operational flexibility to public sector banks.
• The greater freedoms afforded to the banks have been accompanied by an improvement in the overall regulatory framework, including a tightening of prudential requirements.
The liberalisation process resulted in the number of private sector scheduled commercial banks increasing to 61 in March 2005, including 31 foreign banks. Private sector banks had increased their share of total assets of all scheduled commercial banks to 24.7 per cent by March 2005, with foreign banks having a 6.6 per cent share (RBI 2005a). By September 2004, the Reserve Bank had granted operating approval to 25 new foreign banks or bank branches since issuing its 1993 guidelines, bringing the total number of foreign bank branches to 217 (USTR 2005).
The liberalisation of, and resulting greater competition within, the sector – together with tightened prudential requirements – has led to improved efficiencies in the banking system. The return on assets of the banks rose from 0.4 per cent in 1991–92 to 1.2 per cent in 2003–04, while the percentage of gross non-performing assets to gross advances fell from 14.4 per cent in 1998 to 7.2 per cent in 2004 (Reddy 2005). Bad loans account for less than two per cent of all loans, compared to 20 per cent in China (Das 2006). Significantly, the lending competences of the public sector banks are getting better, although there remains considerable scope for improvement in the use of technology. As a group, the public sector banks reduced their operating expenses as a share of total assets from 2.9 per cent in 1996–97 to 2.3 per cent at the end of 2002–03. Their gross non-performing assets as a percentage of gross advances declined from 17.8 per cent in 1996–97 to 7.8 per cent in 2003–04 (Chanda 2005).
Some of the public sector banks have responded well to the new environment, performing on a par with private and foreign banks. However, others continue to perform poorly. New guidelines issued in February 2005 (Box 2.4) may bring about some further improvements.
Under the WTO Financial Services Agreement concluded in December 1997, India committed to permitting 12 new foreign bank branches a year.
P A G E 29 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
The efficiency of financial intermediation continues to be adversely affected by directed lending, with public and domestic private banks required to extend 40 per cent of their credit to priority sectors, notably agriculture and small-scale industries.
Foreign investment policy remains a severe constraint. The previous National Democratic Alliance (NDA) government was moving in early 2004 to automatically allow foreign equity in private banks from all sources of up to 74 per cent, but the election intervened. The current United Progressive Alliance (UPA) government released a ‘roadmap’ for the entry of foreign banks in February 2005 (RBI 2005e). In the first phase, through to March 2009, foreign banks are allowed to establish a wholly- owned subsidiary or convert their existing branches to wholly-owned subsidiaries. RBI guidelines of July 2004 remain in effect. These limit the shareholding and control by a single entity or group of related entities in any private sector bank to ten per cent, with the exception of banks that have been identified for restructuring. Foreign investment from all sources of up to 74 per cent will be considered in these banks. Investment of up to 20 per cent is permitted in public sector banks. Foreign banks were also directed not to acquire any fresh stakes in a private sector bank if such acquisition would take their holdings above five per cent.
Subject to a review, foreign investment in any private sector bank will, in the second phase beginning in April 2009, be permitted up to a 74 per cent limit, and the individual shareholding limit removed. The Indian Government believes that some consolidation of the public sector banks needs to take place before opening up the sector to foreign competition. But only limited amalgamations and consolidations have taken place to date. Some mergers have been attempted but have not materialised because of union concerns over retrenchments and branch closures. If progress on consolidation is not achieved, the scheduled opening up of the sector to foreign competition could well be delayed or even stalled.
The penetration of financial services products in rural India is particularly low, with only 42 per cent of rural households having bank accounts, 21 per cent having access to credit from a formal source and only one percent relying on a loan from a financial intermediary (IndiaMART 2006). Improved access to banking products would greatly benefit rural businesses and households, and help to raise living standards across the rural sector as a whole.
India’s Reserve Bank has urged banks to adopt ‘no frills’ accounts with a view to encouraging greater availability and uptake of financial services by the rural sector and other parts of the population that have largely been excluded from the formal financial system. Banks have been advised to allow limited overdraft facilities in these accounts and provide a General purpose Credit Card (GCC) facility at their rural and semi-urban branches to allow holders to draw cash from their local branches (Thorat 2006).
Foreign banks face a lesser directed lending obligation of 32 per cent.
P A G E 30 Role of Services in Development
Some banks are now beginning to introduce innovative technology products that take account of the higher costs of delivering financial services to rural India, which stem from typically low transaction sizes along with poor roads, power and telecommunications connectivity. For example, ICICI Bank has introduced ATMs with integrated power management systems suitable for use in rural areas. Its Kisan Loan Card enables farmers to withdraw cash and take out cash or crop loans (ICICI Bank 2004). The bank has also been involved in the establishment of Internet kiosks in rural India, which can complement the ATMs to provide a powerful medium for farmers to enhance their business interests. While arguably a step in the right direction, these initiatives remain modest given the magnitude of the rural service gap in banking.
Some of the larger Indian banks with extensive rural branch networks such as ICICI Bank are well positioned to service the rural sector as they are able to defray their technology costs across a large customer base. The recent experience of ICICI and other Indian banks in partnering with community‑based micro-finance institutions as intermediaries for micro lending has been encouraging (Thorat 2006, Rediff.com 2006a).
Insurance India’s insurance sector, like its banking system, has an important role to play in enhancing financial intermediation, creating liquidity and mobilising savings in the economy. As increasingly significant institutional investors in India, insurers are playing a more prominent role in channelling financial resources to investment opportunities and facilitating companies’ access to capital. A well developed insurance market also promotes economic growth by fostering entrepreneurialism and innovation, enabling firms to expand and take on the risks associated with pursuing new business opportunities.
India’s insurance sector has changed significantly over the past few years, having operated as a state monopoly up until 1999 (Box 2.5). Insurance business transacted by Indian private insurance companies has increased rapidly, even though insurers continue to be subject to product price controls and prescriptive guidelines for funds investment (Mulford 2005).
P A G E 31 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
BOX 2.5: REFORMS IN THE INSURANCE SECTOR
• The passing of the Insurance Regulatory and Development Authority Act, 1999 enabled competition from the private sector for the first time. Previously the sector had operated as a state monopoly – the non-life sector under the General Insurance Corporation and its four subsidiaries plus the Export Credit Guarantee Corporation, and the life sector under the Life Insurance Corporation.
• In August 2000, the newly formed Insurance Regulatory and Development Authority invited applications for registration from private life and non-life insurers.
• Foreign investment was also permitted, subject to a 26 per cent foreign equity limit.
• In November 2000, the General Insurance Corporation became the national re-insurer and its subsidiaries were formally de-linked in March 2002.
In the life insurance sector, there are currently 14 private insurers plus the government-owned Life Insurance Corporation. According to the Insurance Regulatory and Development Authority (IRDA), first year (i.e. new business) premium income of the private insurers for the first nine months of 2005–06 was Rs231 billion (US$5.2 billion), 95 per cent up on that for the corresponding period of the previous year.10 By comparison, total new business income grew by over 50 per cent. In the space of just six years, private insurers have secured a 27.8 per cent share in new business.
In the non-life insurance sector, there are currently eight private insurers and six government-owned insurers. Premium income of the private insurers for the first nine months of 2005–06 was Rs169 billion (US$3.8 billion), 52 per cent up on that for the corresponding period in 2004–05. By comparison, total industry premium income grew by 16 per cent. The market share of private insurers consequently rose from 19.6 per cent over the first nine months of 2004–05 to 26.6 per cent over the corresponding period of 2005–06. Health insurance has been the fastest growing segment of the non-life sector.
Most of the private insurers have foreign equity partners. The Finance Minister proposed in his July 2004 Budget Speech that the foreign equity limit be increased from 26 to 49 per cent, but this change was stymied by political factors.
Transport infrastructure – vital for growth A modern economy depends upon an efficiently functioning transportation network. Infrastructure shortcomings are frequently cited as among the chief causes for the failure of India’s manufacturing sector to make greater headway as tariff barriers have come down. India has made some progress in recent years in upgrading and modernising its transport infrastructure, including through Public Private Partnerships (PPPs). But despite the Government’s recognition of deficiencies, much remains to be done. The rate of infrastructure development is likely to lag behind demand and constrain economic growth for some years to come.
10 See www.irdaindia.org/.
P A G E 32 Role of Services in Development
Infrastructure has traditionally been the preserve of the public sector. However, in recognition of limited government finances and the constraints the generally poor state of infrastructure has imposed on economic growth, the government has moved in recent years to open the sector to partnerships with private players, including foreign investors. Against the backdrop of PPPs falling short of its own expectations, the government launched a scheme in July 2005 to fund up to 20 per cent of infrastructure projects, with budgetary provisions for this purpose to be made on a year‑to‑year basis (Indian Department of Economic Affairs 2005). This ‘Viability Gap Funding’ is available on a first‑come, first-served basis, for projects in transport infrastructure and power, as well as other physical infrastructure in urban areas such as water supply and sewerage. To be eligible for funding, projects should provide a service against payment of a predetermined tariff or user charge. Many projects are arranged on a build-operate-transfer (BOT) basis.
Roads The private sector has been permitted to participate in national highway projects since 1995, when the National Highways Act was amended. The top priority for the current Five Year Plan period is the completion of the National Highway Development Project (Phase I and II), comprising the so-called ‘Golden Quadrilateral’ connecting Delhi, Mumbai, Chennai and Kolkata, and the North-South and East-West corridors. The Project involves the four/six-laning of 14 000 km of the existing road network, as well as port connectivity (Indian Planning Commission 2002a). The Project was launched in 1999 at an estimated cost of US$12.3 billion.11 NHDP (Phase III), involving the upgrading and 4-laning of 10 000 km of selected high-density corridors of National Highways, was launched in 2005 at an estimated cost of US$12.5 billion (2005 prices).12 The Golden Quadrilateral is running two years behind schedule, but was nearing completion at the time of publication. The government is still aiming to meet its original target of 2007 for the completion of the North-South and East-West corridors.
Railways Recent improvements in service provision and financial performance on the part of Indian Railways after what the Government has characterised as years of financial trouble and neglect (Singh 2006), have fostered cautious optimism that India will be able to grapple with the task of rectifying massive under-investment in railways and modernising its ailing network.
Since the current UPA Government came to power, Indian Railways has derived efficiency gains through better utilisation of its existing pool of resources. The load capacity (axle load) permitted for previously under-loaded rolling stock has been raised on select routes and wagon turnaround times have been improved across the network (Indian Institute of Management in Rediff.com 2006b). Complex passenger and freight pricing policies have also been simplified. In Indian Railways’ 2006–07 budget for example, freight rates for petroleum products were cut by eight per cent and the number of commodity groups reduced from 80 to 28 (having been lowered from 4000 to 80 in the previous budget) (The Hindu Business Line 2006a).
11 1999 prices 12 See National Highways Authority of India, www.nhai.org/.
P A G E 33 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
Construction of a dedicated high axle-load freight corridor with computerised control on the western and eastern routes was proposed in the 2006–07 budget. In October 2006, work commenced on the Western corridor linking the Jawaharlal Nehru Port Trust and other ports in western India to industries in northern and central India (Singh 2006). Such infrastructure development should go some way to enabling India’s rail network to cope with anticipated growth in freight.
Notwithstanding these developments, an enormous amount of investment will be required to modernise India’s rail network. In response to calls for PPPs to bridge the infrastructure and technology gaps, Indian Railways have reportedly asked for clarification from the Department of Industrial Policy and Promotion on foreign company involvement in the rail sector (Asia Times Online 2006). Rail has largely been the preserve of the public sector to date, although railway container licences were privatised in April 2006. In addition, despite some pricing reforms, rail freight continues to be hampered by excessive charges, in large part because of cross-subsidisation of suburban and lower-class passenger fares (The Hindu Business Line 2006a).
Ports Major reforms have been introduced to the ports over recent years. Private-sector, including foreign- investor, participation in port development has increased markedly. As of 2005, 13 private-sector port projects with a capacity addition of around 47.4 million tons per annum – or over ten per cent of existing cargo throughput at major ports – and involving an investment of Rs26 billion (US$600 million) had been completed (Indian Department of Shipping 2005). Significant investment has also been directed to ‘minor ports’ (a state responsibility) in some states.
Several state-owned ports have leased out terminals to private operators, particularly for container handling. The government has also moved to allow joint ventures between major ports and foreign ports and between major ports and minor ports (Ernst & Young 2005a).
Plans are afoot to corporatise India’s 12 major ports, which handle some 75 per cent of the country’s port traffic (Indian Planning Commission 2002a). However progress has been slow.
Airports and air services Recognising that private sector involvement is required in order to ensure adequate funding for the modernisation of India’s major airports, the Government decided to lease India’s four principal airports – in Delhi, Mumbai, Chennai, and Kolkata – to private sector operators, with a view to upgrading them to international standards. Foreign companies were invited to form consortiums to bid for the restructuring and operating of the Delhi and Mumbai airports, with the winners forming joint ventures with the Airports Authority of India. Arrangements for new international airports at Bangalore and Hyderabad are also proceeding, with private sector participation.
Domestic air services were liberalised in 1994. Private carriers have since been permitted to operate scheduled services in India, subject to the fulfilment of certain criteria. Emulating the emergence of ‘no-frills’ carriers in the United States and Europe, several new low-cost airlines have commenced operations in India since August 2003 to capitalise on increased demand for air travel from the
P A G E 34 Role of Services in Development
rapidly-expanding middle class. The number of domestic passengers is expected to grow from around 20 million a year in 2005 to 50 million a year in five years The( Economist 2006d). Today several private airlines compete to provide regular domestic air services, alongside the government-owned Indian Airlines. Currently, the biggest private airlines are Jet Airways, Sahara and Air Deccan. The limit on FDI in domestic airlines has been raised to 49 per cent, although the Government decided not to allow direct or indirect participation of foreign airlines. The Government has also allowed private airlines to fly on some international routes. The privatisation of Indian Airlines and Air India was initiated a few years ago, but both sales fell through due to the withdrawal of the qualified bidders late during the final stages of the process. The current UPA government still plans to divest equity in the airlines. the slowER reformers
Reforms in finance and transport infrastructure are building a platform for job creation and productivity improvements in the broader economy. However growth in these sectors and high-end services alone will not generate the 200 million new jobs needed to absorb existing unemployed and under‑employed workers and the 160–170 million new workforce entrants expected by 2020 (Indian Planning Commission 2002b).
Some analysts question the capacity of services to absorb labour in a major way (for example, Jha 2005). The services sector’s share of employment is significantly less than its share in economy-wide GDP. In 1999–2000, approximately 30 per cent of India’s 337 million-strong workforce was employed in services. Given its dominant contribution to domestic output, the sector will have to play a major role in absorbing large numbers of low-skilled workers. There are grounds to believe it is well-placed to do so. Services have been the main source of employment growth in the economy since the 1991 reforms. Economy-wide employment growth over the six years to 1999–2000 was virtually entirely due to job creation in the services sector13 (Indian Ministry of Finance 2003, Table 10.9). There is a high income elasticity of demand for services. Demand for services inputs by the manufacturing sector is also growing (see section on ‘Services and manufacturing’ below).
Prominent amongst the services sectors with high employment potential are retail and wholesale trade, and housing and construction. Yet these sectors, along with legal and accountancy services, remain highly protected, and therefore tend to be less competitive compared to those that have been liberalised. Logistics also remains subject to significant hindrances. Moreover, the vast majority of workers in these industries are in the relatively labour-intensive ‘unorganised’ sector, which mainly comprises family businesses and other small employers (Box 2.6). The marked difference in the labour intensity of production between the unorganised and ‘organised’ sectors underscores the dualistic nature of the Indian economy. While small Indian companies in the unorganised sector benefit from being subject to minimal regulation, they are discouraged from growing above a certain size by the heavy regulation, particularly in relation to labour, to which they would become subject. This dual economy prevents modernisation, inhibits productivity growth and impedes job creation in retail and wholesale trade, logistics, legal and accountancy services and housing and construction.
13 Excluding community, social and personal services.
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BOX 2.6: EMPLOYMENT AND OUTPUT IN THE ‘ORGANISED’ AND ‘unorganised’ sectorS
India’s National Accounts Statistics divide the economy into ‘organised’ and ‘unorganised’ sectors. The organised sector consists of the public sector, manufacturing units registered under the Factories Act 194814 and other private corporate sector entities. The unorganised sector comprises units whose activity is not regulated by law, and/or those which do not maintain regular accounts. It includes private and limited companies and unincorporated enterprises, as well as enterprises run by co-operative societies and trusts.
The organised sector is a major force in the Indian economy, yet is not a major source of employment. The organised sector employed 28 million – or a mere eight per cent – of India’s 337 million-strong workforce in 1999–2000. However it contributed 41 per cent of aggregate net domestic product in the same year. Services (excluding community, social & personal services) are not a major employer within the organised sector, but are a significant contributor to overall GDP. They accounted for just 11 per cent of employment in the private organised sector and 29 per cent of employment in the public sector in March 2003 (Indian Ministry of Finance 2006, Appendix Tables 3.1–3.3). While accounting for just 1.9 per cent of aggregate economy-wide employment in 1999–2000, these services contributed over 16 per cent of aggregate economy-wide net domestic product. When community, social and personal services are added in, services’ net domestic product in the organised sector exceeded that in the unorganised sector.
Services are far more prominent as employers in the unorganised sector. In 1999–2000, services employed 64 million workers, representing 19 per cent of aggregate economy-wide employment (Indian Ministry of Finance 2003 and 2006). Over one-half of this employment was in trade, hotels & restaurants.
14 Manufacturing establishments employing 10 or more workers on a regular basis using power plus those not using power and employing 20 or more workers.
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BOX 2.6 (Continued)
The organised sector is a major force in services Share of organised and unorganised gross product for selected services, 1999–2000, current prices
90 Unorganised sector Organised sector 80
70
60
50
40
30
20 Share in gross product (per cent) 10
0 Construction Retail trade, hotels Transport, storage Finance, insurance, Community, social and restaurants and communications real estate and and personal services business services Source: Indian Planning Commission 2002c, Table 24.
Retail trade Retail trade occurs almost exclusively in the unorganised sector, and is dominated by small, family‑owned shops often surviving on unpaid labour. India has the highest density of retail outlets in the world – more than 15 million compared to 900 000 in the United States (Mukherjee and Patel 2006). The retail industry is the largest provider of jobs after agriculture, accounting for six to seven per cent of employment and approximately ten per cent of GDP (The Economist 2006b).
Organised retailing accounts for only 2–3 per cent of the total and is concentrated in large cities, with an estimated 86 per cent occurring in the six biggest cities. Large-scale organised retailing has been held back by poor transport infrastructure, difficulties faced in acquiring tracts of land and rules and regulations at all levels of government. In most states, for example, the Agricultural Produce Marketing Committee Act prevents farmers from selling produce directly to retailers (The Economist 2006b). In 2003, a new shop needed on average 15 licences from 11 government bodies. Securing the licences took six months on average and cost up to 500 000 rupees (2003 study quoted in The Economist 2006b).
In any event, change is coming to the retail sector. Some retail chains are now appearing on the scene and large shopping centres are springing up. Some 40 shopping malls had been opened in India by the end of 2005 – up from fewer than half a dozen a year earlier – with 300 expected by 2007 (IMAGES-KSA Technopak 2005). The organised retail sector is growing at 18–20 per cent a year (The Economist 2006b), and is beginning to employ significant numbers of low-skilled
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workers. Oil, petrochemicals and textiles giant, Reliance Industries is, for example, reported to be investing US$2.2 billion in 1500–1800 supermarkets and hypermarkets and 60 supply centres over the next two years, which will provide employment for some 400 000 – 500 000 people (The Economist 2006b). More recently, Tata Group announced the launch of a retail venture, Infiniti Retail Limited, with 100 stores to be established by March 2010, selling over 6000 consumer electronics and durables products (Tata Group 2006). Apart from benefiting the consumer through lower prices and improvements in the quality of perishable products, organised retailing can benefit agricultural producers and manufacturers by reducing the need for intermediaries and introducing improved practices and technologies throughout the value chain.
The Government moved to open up the sector in a very limited way in early 2006 by permitting FDI of up to 51 per cent in retail trade of ‘single brand’ products, subject to prior approval. ‘Multi-product’ single brands – such as supermarkets’ own branded goods – also appear to be allowed to invest under this regime (The Economist 2006b). A number of global retailers are positioning themselves for an anticipated relaxation of foreign investment policy.
Going on the experience of other developing countries, allowing foreign investment would bring greater competition, best international practice, and increased opportunities for export of Indian products through foreign retailer outlets. Foreign investment would also be likely to spur growth and create employment in labour-intensive industries such as food processing. Food processing in India adds just seven per cent to the value of agricultural output compared to more than 40 per cent in China and 60 per cent in Thailand (Indian Ministry of Commerce and Industry cited in The Economist 2006b).
Logistics Modern retailing is underpinned by efficient distribution systems and integrated supply chains. Handicaps faced by logistics providers have retarded the development of an efficient distribution system in India, and contributed to major losses of perishable goods during transportation. Transport delays and inadequate cold storage mean that between 35 and 40 per cent of fruit and vegetables grown in India rots where it is harvested or in transit (The Economist 2006b). Poor transportation infrastructure and the regulatory disincentives to small operators growing above a certain size have been key contributory factors to this situation, and toll booths and interstate check-point procedures have also hindered the smooth flow of interstate traffic. The Economist (2006a) details a typical 2150 km journey between India’s two most populous cities, Kolkata and Mumbai, for freight carriers, who 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 km per hour with around 32 hours spent waiting at toll booths and checkpoints.
Legal and accountancy services Professional services, particularly legal and accounting services, play a vital role in supporting and facilitating business and encouraging foreign investment. Both legal and accountancy services are subject to significant domestic regulation, notably limitations on size of firm, as well as barriers to foreign entry.
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India has the world’s second-largest legal profession. Its more than 900 000 lawyers are regulated by the Bar Council of India, which is constituted under the Advocates Act 1961. Foreign lawyers and law firms have no avenues to establish any commercial presence in India. FDI is not permitted in the sector, which precludes international law firms from establishing offices. Similarly, Indian advocates are only permitted to enter into profit sharing arrangements with other Indian advocates. While the Advocates Act contains a reciprocity provision, which would permit legal practice in India by citizens of a country where Indian legal qualifications are recognised, in reality India’s legal services market remains closed and foreign lawyers are not permitted to practice, nor to provide advisory services on foreign law. Multi-jurisdictional legal advice is part of the essential infrastructure required to provide a sound base to encourage and increase foreign direct investment and international trade.
India’s accountancy services sector is highly fragmented because firms are only allowed to operate as partnerships or as sole proprietorships (under self regulation), and no more than 20 professionals are permitted in any one firm (under the Partnership Act). There are fewer than 400 firms with 5 or more partners. The Institute of Chartered Accountants of India regulates the profession. To date it has not recognised any foreign qualifications. Only graduates of an Indian university can qualify as accountants in India. Foreign accounting firms can practice in India if their home country provides reciprocity to Indian firms. However, foreign accountants may not be equity partners in an Indian accounting firm. Internationally recognised names may not be used, unless they are comprised of the names of proprietors or partners or the name is already used in India. Internationally-based accounting firms are only permitted to operate as consultants.
These barriers to foreign entry preclude exposure to competition from best-practice legal and accounting firms, in turn driving up transaction costs for other sectors.
Dwelling construction The construction services sector is highly fragmented, in part due to the Urban Land (Ceiling and Regulation) Act, which effectively prevents people from buying up large tracts of land to construct houses (World Bank 2004). If reforms precipitate large-scale construction, the sector has the potential to create employment opportunities for significant numbers of low-skilled workers.
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sectors vital to broad-based development
The growth which has resulted from the economic reforms of the 1990s appears to have contributed to improvements in living standards. The proportion of people living below the poverty line has, according to official estimates, declined significantly, from 36 per cent in 1993–94 to 26 per cent in 1999–200015 to 22 per cent in 2004–2005.16
Economic reforms have not, however, led to equal distribution of growth, either between the rural and urban areas or between states. Coefficients of variation in poverty rates across the states have increased since the mid-1990s and the regional variation in economic growth rates has remained high despite the reforms (Jha 2005). In the case of the services sector, growth has mainly been in urban areas – in particular in the larger cities – and has occurred in some states more than others.
Improvements in the delivery of education and public healthcare services, particularly in rural areas, are critical if more broadly based development is to ensue, with the fruits of reform flowing through to all sections of society. Addressing deficiencies in the delivery of education and public healthcare services could also be important in ensuring India’s growth model remains politically sustainable. Moreover, expanded education and healthcare services will create high-quality employment opportunities, particularly in rural areas.
The poor state of public finances (Box 2.7) has constrained the provision of education and healthcare services and inhibited infrastructure development. The Government recognises that the growth dividend of reform can provide it with more resources to address social issues and ensure at least a minimum level of services for all sections of the community. If the states and the centre succeed in moving towards the elimination of their revenue deficits by 2009–10 – including through better expenditure management – this should place them in a better position to devote more resources to education and health. At the same time, commentators suggest that many states need to consider reforms to simplify the business environment; adopt a more investor-friendly approach; and improve the quality of governance so as to ensure better delivery of education, healthcare and other public services (World Bank 2003 2006b, Das 2006).
15 28.6 of the population was living below the poverty line in 1999–2000 if the data set is adjusted to ensure comparability with the 1993–94 estimates (World Bank 2003). 16 Official poverty estimates for India are based on regular surveys of consumer expenditure carried out by the National Sample Survey (NSS) Organisation. The official poverty line is set with reference to minimum daily calorie requirements. The official numbers have been the subject of intense debate, both for excluding broader measures of nutrition and due to methodological changes over time. Changes to the NSS methodology in the 1999–2000 survey in particular called into question its comparability with previous estimates. Despite the continuing controversy, Thirlwell (2006) points out that the figures, combined with supporting evidence from national accounts estimates of consumption, data on wage rates, and other surveys, do suggest that India has experienced a continued fall in poverty since the 1991 reform push.
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BOX 2.7: The state of india’s Public finances
Large revenue deficits at the centre and in the states over the years have resulted in under- investment by India’s public sector in health, education, power and transport infrastructure.
The central government has gradually wound back its overall fiscal deficit from its 1986–87 peak of 8.5 per cent, but at the expense of a sharp contraction in capital outlays. Capital expenditures have fallen from seven per cent of GDP in 1986–87 to an estimated two per cent for 2005–06. Conversely, the ‘revenue deficits’ (current revenues – current expenditures gap) of the states only became a significant problem from the late 1980s.
Revenue and fiscal deficits of the centre and states
gross fiscal deficit – centre 9 gross fiscal deficit – states revenue deficit – centre 8 revenue deficit – states 7 6 5 4 3 Per cent of GDP 2 1 0 1987–88 1988–89 1989–90 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–00 2000–01 2001–02 2002–03 2003–04 2004–05 2006–07 2005–06 1986–87
Source: RBI 2005b and 2006–07 Budget estimates.
The state of Indian government finances reflects a high debt servicing burden, and deficiencies in the tax system and public expenditure management. Central government tax receipts were expected to amount to just 10.48 per cent of GDP in 2005–06. State government tax receipts have been relatively healthy, amounting to an estimated 8.99 per cent of GDP in 2005–06. Interest payments consume over one quarter of total central government expenditures. The debt service burden has eased in recent years as interest rates have come down, but remains vulnerable should rates pick-up again.
The Government has sought to address the country’s public finances through the enactment of the Fiscal Responsibility and Budget Management Act in August 2003, under which the central government’s revenue deficit was targeted for elimination by March 2008. The date for the achievement of these targets has since slipped to 2009–10. To ensure that the states get their finances in order, the Government has made debt relief conditional on their enacting similar fiscal responsibility legislation (Indian Ministry of Finance 2005).
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BOX 2.7 (Continued)
The revenue deficits and overall fiscal deficits of both the centre and the states have been tracking downwards in recent years. The combined fiscal deficit (excluding losses of financial public sector enterprises) in 2005–06 amounted to 7.45 per cent of GDP. Further fiscal consolidation is under way, with the Government projecting in its 2006 Budget that the centre’s revenue deficit and fiscal deficit will fall in 2006–07 to 2.1 per cent and 3.8 per cent of GDP respectively.
The Government’s strategy to meet the fiscal targets focuses on increasing revenues by broadening the tax base and removing distortions in the tax regime, together with complementary measures to improve expenditure outcomes. The strong economy is also assisting in improving the tax take.
Source: RBI 2006c
Education services While India has expanded its education system over recent years, many shortcomings still need to be addressed to lessen the constraints it imposes on the growth potential of the Indian economy.
The number of out-of-school children in the 6–14 year age group fell from 42 million at the beginning of the Tenth Five Year Plan period to 8.1 million in September 2004 – although the target of achieving universality of elementary education by 2003 has not been met. Notably also, the statistics do not take into account high drop-out rates (Khan and Roy 2003). The Tenth Five Year Plan also set the objective of all children completing five years of schooling by 2007 and eight years by 2010. This will also experience some slippage. Improvements in enrolment rates are leading to major improvements in literacy rates – 65 per cent in 2001 and an anticipated 75 per cent by 2007, up from just 18 per cent in 1951. The UPA Government is also committed to ensuring the educational needs of disadvantaged groups are better addressed. The two per cent ‘Education Cess’ levied on taxes since 2004 is greatly assisting the financing of much higher levels of basic education (Indian Planning Commission 2005).
In the higher education sector, enrolments grew at around five per cent annually over the two decades to 2002–03, from 3.3 million in 1983–84 to 9.2 million.17 In 2000–01, 1.9 million students were enrolled in tertiary-level technical subjects (science, engineering, mathematics and computing) (UNCTAD 2005a). The gross enrolment rate in higher education (18–23 year age group) is around seven per cent, which is considerably higher than the average across developing countries, but lower than the average across Asia and significantly lower than in OECD countries (Kapu and Mehta 2004). However, the sector is growing rapidly. Under the Plan, an enrolment rate of ten per cent is targeted for 2007. By 2004–05, there were 229 state/central universities and 95 ‘deemed universities’,18 up
17 University Grants Commission data, available at www.ugc.ac.in. 18 Deemed universities are largely free of government regulations and more entrepreneurial than government-run universities.
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from 133 and 27 respectively in March 2002. The number of colleges increased by almost one-third to 16 000 over the same period (Indian Planning Commission 2005).
Despite some improvements, the education system still has many weaknesses. While there have been significant increases in elementary school teacher numbers during the current Plan period, primary school teacher-pupil ratios in 2002 were 1:42, compared with around 1:20 for the upper-middle income reference level that India aspires to (Indian Planning Commission 2002b). Around one out of four teachers in government primary schools were absent during three spot checks, while one out of two teachers present were not actually teaching (Chaudhury, Hammer, Kremer, Muralidharan and Rogers 2005). Concerned over the quality of schooling, much anecdotal evidence suggests parents, even in slums and villages, have increasingly been taking their children out of government schools and placing them into private schools. Such is the importance accorded to education, 16 per cent of Indian children from small villages are now enrolled in private primary schools, which typically charge US$1–3 a month (Das 2006).
India’s universities and technical colleges are also of variable quality, and on the whole the quality of university education has fallen (Indian Planning Commission 2002a). At one end of the spectrum, the seven campuses of the Indian Institute of Technology (IITs) and the six campuses of the Indian Institute of Management (IIMs) are well resourced and internationally renowned. On the other end, many colleges and universities do not deliver education to rigorous quality standards and many of India’s approximately 500 engineering colleges need to be upgraded (Indian Planning Commission 2002b). In addition, only a small fraction of the college-age population is able to be accommodated. Getting into the best institutions is exceedingly difficult. For example, in 2005 only two per cent of those taking the rigorous admission tests were accepted into the IITs. This compares with a ten per cent acceptance rate by Harvard.19
The Indian government acknowledges the need for private sector investment in higher education, including from reputable foreign universities (Indian Planning Commission 2002b). Otherwise, those unable to get into the prestigious institutions will often look to overseas study if it is within their means. The extremely capable students who are not accepted into the IITs and IIMs will often look for an education outside India (The Economist 2005a).
While the private sector is playing an increasing role in the university sector, regulation currently limits the scope for private providers. A number of private universities have been set up by large industrialists and others. Another model is provided by the International Institute of Information Technology in Bangalore. Although funded by government and the information technology industry, the government does not exercise control over it. Its revenues derive from student fees, industry and government. The number of colleges providing professional education with private management structures has grown rapidly since the early 1990s, especially engineering, medicine and business schools. The freedoms of these private colleges have however been curtailed as they are subject to the same raft of regulations as state colleges. Moreover, while students may be enrolled in publicly-funded colleges and
19 www.iitbombay.org, ‘What’s New, September 2005.
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universities, they are increasingly turning to private sector providers of vocational training (Kapu and Mehta 2004). The number of private schools has also grown rapidly in recent years.
FDI in the education sector with up to 100 per cent equity is permitted under the ‘automatic route’, that is without requiring government approval. However, qualifications issued by these institutions are not recognised by the Indian Government. The government is reportedly in the process of finalising legislation, based on the recommendations of the CNR Rao committee report, which will regulate foreign university involvement in the sector (The Economic Times Online 2006). Constraints foreign providers will face include the need to adopt fee structures laid down by the University Grants Commission. They will also have to go through a two-phase approval process, with their ability to set up ongoing operations dependent upon their performance in an initial trial period. A range of controls also apply in technical education. Foreign providers need to have an Indian partner and obtain approval to operate from the All-India Council for Technical Education (AICTE).
India’s pool of qualified scientists and engineers is large by international standards. However the rapidity of growth in knowledge-based industries such as information technology, consulting services and biotechnology, means it will need to turn out increasing numbers of high quality graduates in these disciplines. Apart from efforts to ensure that all its institutions are up to an acceptable standard, there is also a need to define curricula that better reflect the needs of the labour market. Industry will need in parallel to invest considerably more in research and development, in addition to the strong commitment to training being demonstrated by the IT–ITES majors.
Healthcare services A clear duality has arisen in India’s healthcare systems. Public spending on healthcare is increasingly constrained by public finances. Private healthcare now provides the bulk of the country’s healthcare services, primarily through independent practitioners and increasingly through well-equipped private hospitals. With the encouragement of government, a number of private hospitals are now also exporting their services – in the form of a range of treatments and operations – to foreigners. While the better- off in India can afford private care, the majority of the population has to make do with a public health infrastructure that is under-equipped, under-financed and suffers from a shortage of doctors and nurses. There are for example just 1.5 hospital beds per 1000 people, which compares poorly with countries such as China, Brazil and Thailand which have an average of 4.3 beds per 1000 people (The Hindu Business Line 2005). Improvements measured in terms of public health indicators have been uneven both between urban and rural areas and among states. Public expenditure on healthcare presently amounts to just 1.0 per cent of GDP, which is very low compared with many other developing countries. State allocations to health have been declining over the past decade, and in 2003–04 were just 4.1 per cent of total state government expenditures and 0.75 per cent of GDP (Indian Planning Commission 2005).
The 2002 National Health Policy put forward the objective of increasing public expenditure on healthcare to 2.0 per cent of GDP by 2010 (Indian Ministry of Health & Family Welfare 2002). To
P A G E 44 Role of Services in Development
achieve this, it envisaged state sector health spending increasing to eight per cent of state budgets by 2010 with the share of central grants to constitute at least 25 per cent of total health spending.
The Report of the Committee on India Vision 2020 also pointed to the need to lift public expenditure on healthcare dramatically, and recommended that it be increased to the upper-middle income country reference level of 3.4 per cent of GDP by 2020 (Indian Planning Commission 2002b).
The current UPA Government sees an urgent need to put substantially more resources into the public healthcare system and, in its National Common Minimum Programme, has undertaken to raise expenditure to at least 2–3 per cent of GDP over the five years to 2009 and introduce a national scheme for health insurance for poor families (National Advisory Council 2004). Meeting these targets will require a major mobilisation of financial and manpower resources.
The National Rural Guarantee Scheme and National Rural Health Mission are aimed at raising living standards and health standards in rural areas. The National Rural Guarantee Scheme, launched by the Government in 2005, is an ambitious program aimed at reducing rural poverty. It is targeted at the rural unemployed and guarantees 100 days of work on infrastructure projects each year to one member from each of India’s 60 million rural households. The first phase of the program will be focused on the country’s poorest and least developed districts. The National Rural Health Mission (2005–12) aims to tackle the poor health infrastructure in rural areas. It forms an important part of the Government’s strategy to raise public spending on health from 0.9 per cent to 2–3 per cent of GDP.20
INTERRELATIONSHIP OF SERVICES WITH MANUFACTURING, AGRICULTURE AND MINING
Services sector developments are facilitating modernisation in India’s relatively capital-intensive manufacturing sector and in agriculture. Job creation in manufacturing, particularly in labour-intensive industries such as textiles, could play a key role in absorbing India’s growing labour force, lifting millions of rural Indians out of poverty. Moreover, once an investment-friendly policy platform is established for the minerals sector, mining services and technology should enable India to derive maximum benefits from exploration, which itself can bring economic development to remote and underdeveloped regions.
Services and manufacturing While the share of manufacturing in India’s GDP remained largely static throughout the 1990s at around 20 per cent, it has recently posted growth rates in the order of ten per cent. The sector’s competitiveness is being enhanced by the tendency to contract out an increasing array of service functions, which has been made possible by the services tradability revolution. Functions previously undertaken ‘in‑house’ by manufacturers – such as software development, design and testing, back‑office tasks and post‑sales service – are now being outsourced to world-leading Indian service
20 See Ministry of Health & Family Welfare website, http://mohfw.nic.in/
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providers. In this way knowledge‑intensive Indian services are supporting innovation in India’s manufacturing sector. Additionally, increased services sector incomes provide a stimulus to consumer demand for manufactures.
The global trend towards a ‘service approach’ to manufacturing production, with an increasing emphasis on design and customisation, is making India more attractive to international investors. India’s strengths in software and its engineering capabilities place it in a prime position to exploit this shift, as does the experience in a service-based approach to customers gained from its prominence as a business process outsourcing destination. Companies such as ABB and Sigma Electric are already exploiting these capabilities (Financial Times 2006).
An industrial transformation towards advanced manufactures is now under way in India. PC, whitegoods and telecommunications manufacturers such as Dell, Nokia and Motorola have recently established advanced plants. The success of these facilities depends upon a variety of professional service inputs, and can therefore be expected to stimulate demand and employment growth in niche service sectors.
Many commentators (e.g. Goswami 2005, Das 2006) have pointed to manufacturing’s low share of India’s GDP compared to that of other developing countries in Asia and the need for it to expand more rapidly to absorb a fast-growing labour force. Concerns have been raised that India’s emerging strengths in high-tech, high-skill manufacturing may not generate large numbers of jobs (see for example, Das 2006). Indian manufacturing, at least in the formal sector, tends to be biased towards capital-intensive production and predominantly requires skilled labour. Technology-intensive engineering goods, for example, account for 21 per cent of India’s merchandise exports, while chemicals (including pharmaceuticals) account for an additional 14 per cent (Thirlwell 2006).
In contrast India remains relatively unrepresented in many labour-intensive manufacturing sectors, despite boasting healthy productivity growth and much lower wages than its competitors. In 2002 Indian workers in the manufacturing sector earned about US$23.80 per month, compared to US$110.80 in China (Thirlwell 2006). India may be able to exploit its competitive advantage in labour costs to significantly expand labour-intensive manufacturing but to do so would need to be able to address transport infrastructure bottlenecks, improve the business environment (including complex labour regulations) (Kochhar, Kumar, Rajan, Subramanian and Tokatlidis 2006) and improve basic education in rural areas to equip potential workers with elementary literacy and other necessary skills. The take-off of labour-intensive manufacturing in India is also impeded by a limited supply of skilled and managerial labour, which is in high demand in export-oriented services sectors and therefore increasingly costly (Kochkar et al 2006). Nonetheless, it would create employment opportunities for large numbers of low-skilled workers. Industries such as textiles have much potential. The Confederation of Indian Textile Industry, for example, forecasts that the textiles industry could increase its exports from the current level of US$17 billion to US$40 billion by 2010 and provide 12 million additional jobs.
A stronger manufacturing sector can in turn generate employment opportunities in services, and could provide a means for rural Indians to move out of subsistence agriculture. A recent Confederation of Indian Industry–Boston Consulting Group report highlights the fact that the manufacturing sector provides a conduit for agricultural labour looking to enter more value-added industries and also has
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a substantial multiplier effect in creating jobs in the services sector. Several global studies have estimated that every job created in manufacturing can lead to the creation of 2–3 jobs in services (IBEF 2006a).
Services and agriculture Production in the agriculture, forestry and fishing sector remains labour-intensive. The sector accounted for 57 per cent of employment in 1999–2000 but contributed only 25.3 per cent of total output. Its share of GDP has since declined steadily to 19.9 per cent. Over the post-reform period, 1991–92 to 2005–06, agriculture, forestry and fishing grew at a trend rate of just 2.6 per cent. The creation of large numbers of low-skilled jobs in services sectors like retail and wholesale trade, hotels and restaurants, and housing and construction – as well as in labour-intensive manufacturing – could absorb surplus labour from agriculture, and thereby increase that sector’s productivity.
Growth in organised retailing could also benefit farmers by reducing the need for intermediaries while the modernisation of logistics could reduce losses stemming from the spoiling of agricultural produce during transportation (see ‘The slower reformers’ above). Meanwhile, high-end service provision, notably in relation to IT and telecommunications, is being directed towards raising the competitiveness of India’s fragmented agricultural sector (Box 2.8).
BOX 2.8: the ‘E-CHOUPAL’ InitiATIVE – FACILITATING RURAL DEVELOPMENT
The ‘e-Choupal’ initiative was launched in 2000 by ITC, one of India’s largest companies with a diversified presence in many products and sectors and a large exporter of agricultural products. The initiative aims to raise the competitiveness of India’s fragmented agricultural sector by empowering Indian farmers through the uptake of the Internet at the village level. Today, e-Choupal services reach out to more than 3.5 million farmers growing a range of crops in over 36 000 villages through nearly 6000 village ‘Internet kiosks’ across nine states. E-Choupal is aimed at a more efficient supply chain. Farmers are able to gain ready access to information in their local language on such things as the weather, market prices and modern farm practices. They are also able to make more informed decisions on the purchase of farm inputs and on the sale of their produce. The development means that farmers can look to collective purchases of inputs and sell their produce without the need to go through intermediaries and multiple handling.
Source: ITC website, www.itcportal.com.
Services and mining India has large known reserves of bauxite, iron ore and coal and, given its geology, may also possess large deposits of other minerals such as gold, copper, lead, zinc and diamonds (Federation of Indian Mineral Industries 2006). Yet only a small fraction of the area conducive to mineral deposits has been explored, owing in part to prevailing policies. While progressive reforms beginning with the enactment
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of the 1993 National Mineral Policy have paved the way for private and foreign investor participation (Federation of Indian Mineral Industries 2006), investment in exploration and mine development has been inhibited by a number of factors. There is currently no guarantee that exploration leases will be converted to mining leases. Establishing a mining project in India requires multiple approvals from different layers of government (The Hindu Business Line 2006b). In addition, captive mining policies grant power, iron, steel, and cement producers access to coal and iron ore at extraction cost rather than market value (The Times of India 2006), often leading to small--scale operations and sub--optimal development of resources.
A high-level committee under the chairmanship of former Deputy Director General of the WTO, Professor Anwarul Hoda was established in September 2005 to recommend policy changes to attract more foreign and domestic investment in mineral exploration. The Hoda Committee’s findings, published in June 2006, are anticipated to form the basis of a new mining policy. The Committee’s key recommendations include the establishment of a maximum 5000 square-kilometre area in which prospecting can take place; the introduction of 3-year, 100 sq km ‘Large Area Prospecting Licenses’ within this area; the institution of an ‘open skies’ policy under which reconnaissance permits would be granted to more than one applicant for the same area; and the removal of all qualitative and quantitative restrictions on iron ore exports.
If India’s central and mineral-rich state governments can agree on a liberal, investment-friendly and internationally competitive policy regime with clearer and more transparent regulation, large scale private (including foreign) investment in the mining sector is likely to take place. As mineral deposits generally occur in remote areas with poor infrastructure (Indian Ministry of Mines 1993), exploration and mining can be harnessed to contribute to economic development in India’s more remote and underdeveloped regions, in addition to contributing to its overall prosperity.
The application of advanced mining services and technology for exploration, software and systems, safety, environmental management, communications and training should enable India to derive maximum benefits from mineral exploration. Leading-edge expertise in mining services and technology is readily available from companies in countries such as Australia.
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OPPORTUNITIES FOR australian service providers in indiaI
KEY POINTS
• India’s services-driven development model is creating substantial openings for business.
– Additional opportunities are likely to emerge over time as the momentum for reform fosters liberalisation and deregulation in protected sectors.
• Key areas of current and emerging demand in India, in which Australian companies have significant expertise, include:
– information technology
– telecommunication services
– financial services
– infrastructure, construction management and consulting services
– education and training
– tourism and travel-related services
– film and television
– sports and related infrastructure
– healthcare services
– research, including biotechnology
– mining services
– retail
– logistics, and
– professional services.
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‘No big international company can be without an India strategy’
(The Economist 2006c)
Opportunity knocks where change occurs. As the previous chapters highlight, India’s economy is currently in a phase of significant growth, largely induced by the expansion of the IT and other leading- edge services sectors. But the pattern of growth posited in Chapter 1, wherein the rapid development of one sector of the economy catalyses reform and expansion of others, suggests that it is prudent for Australian services providers to look beyond the immediately obvious for longer-term possibilities; and to differentiate between the different types of market opportunities that will arise depending on the current state of reform initiatives and growth in each sector.
There is no doubt that India’s current boom sectors offer opportunities for Australian participation. Australia is itself an attractive international business process outsourcing destination (Greene 2006, A.T. Kearney 2005) because of its experienced, English-speaking and educated workforce and stable business environment (A.T. Kearney 2005). While this implies a certain degree of competition, it also suggests scope for collaboration taking into account each country’s particular strengths, including in selling services to third country markets. To a significant extent, this is starting to occur. As disaggregation of services provision occurs through the development of international production networks, bilateral activity can be expected to intensify, to the benefit of both countries.
While these are important trends, the potential for major expansion in bilateral services trade is arguably in the sectors which are only now starting to take off in India. As noted in Chapters 1 and 2, broad-based economic development in India implies the ongoing reform and modernisation of a number of crucial facilitating sectors – including telecommunications, finance, infrastructure, retail, logistics, construction and transport, as well as the application of services to manufacturing, agricultural production and distribution, and mining. Given the scale – and particularly the potential scale – of India’s economy, the size of this task is enormous. Reform and modernisation imply the need, on a huge scale, for capabilities and skills which to date may not have been extensively required or available in India. Whether in finding these capabilities or in building indigenous capacity, India will face a strong need to enlist the participation of external providers.
Australian service providers are well positioned to capitalise on emerging market opportunities in India. Education is already a major services export for Australia, as are professional services, and this can only be expected to increase (see Chapter 4). But Australia also has significant expertise in many other areas where India will be seeking to augment its capabilities. This chapter examines some of those areas, highlighting the opportunities that could be expected to arise if India continues along its current growth trajectory.
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Information technology
India’s information technology (IT) sector is attracting increasing attention from foreign investors. India’s Minister of Communications and Information Technology, Dayanidhi Maran, has said that planned foreign investment in telecommunications and information technology is expected to double to US$22 billion in 2006 (The Economic Times Online 2005). Many of the major global information technology manufacturers and service providers – including Microsoft, Intel Corporation and Cisco Systems – along with smaller Australian companies (see Chapter 4) are stepping up their presence in India. While ‘offshoring’ to affiliated Indian businesses (‘captive’ units) has been growing strongly, many multinationals are setting up development centres in India and also targeting the fast-growing domestic IT services market.
The Information technology-information technology enabled services (IT–ITES) industry is projected to grow at an annual rate of over 25 per cent to US$148 billion by 2012 (Indian Investment Commission 2006a). In a similar vein, a NASSCOM-McKinsey report in 2005 predicted that on the back of the strong growth in offshoring, the country’s IT and business process outsourcing industry would account for seven per cent of India’s GDP by 2010, and about 17 per cent of GDP growth and 44 per cent of export growth over five years to 2010. IT–ITES exports are projected to grow at 25 per cent a year to reach US$60 billion by 2010 (NASSCOM-McKinsey 2005). Minister Maran has said this projection may be too conservative (The Economic Times Online 2005).
Indian IT companies are becoming formidable multinationals in their own right. They are building up global networks of facilities to service clients better in-country and thereby compete more effectively with the IBMs and Accentures of the world (NASSCOM 2005b).
As of October 2006, 26 first and second tier Indian IT companies had established a presence in Australia. In addition to providing IT solutions to local businesses, these companies are using their Australian subsidiaries to secure or help take advantage of global market opportunities, in turn generating high-quality employment for Australians in engineering, business management and consulting, stimulating collaboration in research and development, and creating export opportunities (see Chapter 4). The Australian operations of TCS, Satyam, Infosys and Birlasoft, for example, have generated significant employment and collaborative research opportunities in software engineering and telecommunications, while an R&D and distribution agreement between the CSIRO and Infosys has paved the way for the commercialisation and export of leading-edge Australian intellectual property. As the trend to deliver services through international networks intensifies, more and more opportunities for collaboration between Australian and Indian firms to take up joint development work and service third markets are likely to emerge.
In many respects, Indian IT companies are world class, implying that opportunities for Australian companies will come in the form of cooperation and collaboration, enabling each partner to specialise in its strengths and augment its capabilities in other areas. One prospective area for such collaboration is knowledge process analytics – an area into which Indian companies are increasingly seeking to move, and where Australia has established strengths. This is of particular relevance to the financial services
P A G E 51 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
sector. Australia can avail itself of its highly-skilled financial services workforce, sophisticated financial markets, and cost advantages over competing destinations. India also has application solutions gaps in mining, media and banking – areas where Australian companies have evident strengths. Australian IT people are also recognised for their business orientation and problem solving strengths, which can complement Indian technical expertise. Indian companies can look to developing the requisite capabilities themselves but often it will make sense for them to adapt offerings from overseas. There may also be opportunities for Australian businesses to win market share in overseas markets by partnering with Indian outsourcing companies (ACS 2005, Invest Australia 2006).
Austrade has identified a range of opportunities for Australian companies in IT, including software products for industries such as health, transportation, insurance, finance and entertainment; consultancy and other services for India’s burgeoning ITES sector; network and Internet security consultancy and products; e‑governance; and joint research and development projects for emerging technologies and solutions around established technologies (Austrade 2006b). Given Australian capabilities in distance education, tele-health and remote monitoring, there is scope for Australian business to become involved in education and health initiatives which can help raise living standards in India’s rural sector.
A visit in October 2005 by a high-level industry delegation to India led by the Australian Minister for Communications, Information Technology and the Arts, Senator Helen Coonan, resulted in a memorandum of understanding (MOU) being signed to promote further cooperation in developing information and communications technology industries and strengthening business linkages (Coonan 2005b).
Telecommunications
Foreign investors are taking an increasing interest in India’s fast-growing telecommunications sector, principally the mobile phone market. Total FDI approvals in the sector up to September 2005 amounted to Rs416 billion (US$9.6 billion) (Indian Ministry of Finance 2006). In October 2005, Vodafone secured a ten per cent stake in Bharti Tele-Ventures Ltd for approximately Rs67 billion (US$1.5 billion), which at the time was the largest ever single foreign investment in India (Bharti Enterprises 2005b). Singtel and investment house Warburg Pincus were already partners with Bharti. Two other mobile phone operators also have foreign partners. Hutchison Essar is a joint venture between the Essar Group and Hong Kong-based Hutchison Whampoa. AT&T is a joint venture partner in IDEA Cellular. Cisco Systems, a leader in networking for the Internet, is also reported to be ramping up its involvement in India, in part on the back of an assessment that deregulation is exposing local businesses to increased competition, forcing them to invest in communications and other technology (The Mercury 2005).
With revenues of US$17.8 billion in 2004–05, India is now the fifth-largest telecommunications services market in the world. The market, and in particular the mobile market, is expected to continue to grow at break-neck speed in coming years. The telephone subscriber base is projected to grow at 30–40 per cent a year to reach 250 million by 2009–10 (Indian Investment Commission 2006a).
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While growing rapidly, the Indian telecommunications market, particularly in relation to mobile phones, is extremely competitive. Rising incomes and cheaper services are one side of the equation. Peak telecom tariffs have fallen dramatically over the past decade, aided by stiff competition in the marketplace. Domestic long distance rates presently vary between Rs1.2 (US2.7 cents) and Rs2.4 (US5.5 cents) a minute, while mobile rates are around US2–3 cents a minute. Further dramatic falls are expected in the near term, especially in long distance call rates (Indian Ministry of Finance 2006, IBEF 2005b). On the other side of the equation, mobile carriers are now expanding their networks into untapped rural areas where more than two-thirds of the population lives (The Economic Times Online 2005).
AT&T Global Network Services India, a joint venture 74 per cent-owned by AT&T, became the first foreign telecom operator in India to secure national long distance and international long distance (NLD/ILD) licences, following keen interest from numerous foreign carriers (Digital Media Asia 2006). An ILD enables foreign carriers to provide international connectivity to network facilities which they operate in other countries. A number of guidelines that impede the provision of international voice and data telecommunications services were introduced in 2005 when the foreign equity limit in telecommunications was raised from 49 to 74 per cent (see Box 2.3). Other international carriers remain interested in applying for NLD/ILD licences, pending the outcome of an Indian Government review of the guidelines, which is expected in early 2007.
Financial services
Banking The banking sector is expected to grow strongly in coming years, reflecting buoyant conditions and the increasingly important role played by banking intermediation in a liberalising economy. The penetration of financial products, for example bank accounts, credit cards, and mortgages, is currently quite low by comparison with that in other developing countries. The market potential in rural India is particularly significant (see Chapter 2). One projection is for total banking assets to double by 2010 to US$915 billion, representing a compound annual growth rate of 15 per cent (Indian Investment Commission 2006a). At the same time, the opportunities that arise in the rural sector in particular may be difficult for foreign companies to access, involving, as they do, the potential for large numbers of very small transactions.
While public sector banks still dominate Indian banking, the opening of the sector since the early 1990s has enabled the generally more efficient foreign and privately-owned banks to secure an increasing share of the market – currently around 25 per cent.
Three foreign banks – Standard Chartered Bank, Citibank and HSBC – accounted for 64 per cent of the assets of all foreign banks in March 2005 (RBI 2005a). All three are expanding their presence in India (Sify 2005). HSBC, whose activities in India are focused on outsourcing operations, invested US$150 million in India through the first 11 months of 2005. India’s largest foreign bank,
P A G E 53 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
Standard Chartered, which has been operating in the Indian market for 150 years, invested around US$120 million over the same period. The bank reportedly plans to continue expanding its operations by opening 10–12 branches every year and focusing on the fast-growing retail segment (Sify 2005). Citigroup, whose activities are focused on retail and corporate banking, is currently expanding its research and equity businesses. Deutsche Bank is also restarting its retail banking operations in India. All major Australian banks are represented in India and are actively appraising market opportunities (see Chapter 4).
Foreign banks have been prevented from holding a stake of more than five per cent in domestic private sector banks but a number of them, including some Australian banks, are positioning themselves for the opening of the sector to greater foreign ownership, slated for March 2009.
Insurance The opening of the life and non-life insurance sectors to foreign investment in 2000 spurred considerable activity by foreign investors. ICICI Prudential and Birla Sun Life have each generated more premiums on new business in India than in any other markets in Asia (IBEF 2006c). India’s imports of insurance services doubled to US722 million in 2004–05. Given the importance of insurance availability to encouraging risk-taking business ventures, demand for such services can only be expected to increase as India continues to grow.
With India’s large population, increasing discretionary incomes and a growing awareness of insurance products, continued strong growth in the life- and non-life sectors is widely expected in coming years. Life insurance premium income (first year plus renewal income) was running at around 2.6 per cent of GDP in 2003–04, which is low compared with more mature markets. Independent research and advisory firm, Financial Insights projects India’s life insurance sector will continue to expand at around 20 per cent a year over the medium term (Financial Insights 2005).
AXA Asia Pacific and Aon have each established joint ventures in the insurance sector (see Chapter 4), and QBE Insurance is reported to be eyeing opportunities in India (Canberra Times 2005).
Infrastructure, CONSTRUCTION MANAGEMENT AND CONSULTING SERVICES
India is according the highest priority to bringing its transport infrastructure to a standard which will support the rapid growth of the Indian economy. All sectors – road, rail, ports, and aviation – are in need of massive upgrades and modernisation. Prime Minister Singh indicated in October 2006 that the country needed investment in infrastructure to the tune of US$320 billion over the coming 5–10 years. In transport as well as water, sewerage and tourism projects, the government is enlisting private sector involvement in a major way through Public Private Partnerships. Aside from supplementing scarce government finances, foreign investment is bringing management, engineering and design skills.
Most private insurance companies are joint ventures between Indian and foreign partners.
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Roads At least US$50–60 billion investment is required over the coming five years to improve road infrastructure (Indian Investment Commission 2006a). Private sector investment is being sought, under build-operate-transfer (BOT) arrangements, to assist with the implementation of the National Highways Development Project. Several incentives are available to encourage private sector, including foreign investor, participation. These include up to 100 per cent foreign equity; subsidies of up to 40 per cent of project cost to make projects viable; 100 per cent tax exemption in any consecutive ten years out of 20 after project commissioning, and the right to retain tolls (Indian Department of Road Transport and Highways 2006). A number of foreign players, including SMEC (Box 4.1), have already secured contracts associated with the construction and upgrading of sections of the national highways network.
Airports and air services The government is considering private investment in a further 25 city airports, in addition to leasing out India’s four major international airports at Delhi, Mumbai, Chennai and Kolkata to private operators and building new international airports in Bangalore and Hyderabad with private sector participation (see Chapter 2). Altogether, over US$15 billion is expected to be invested in airport development over the coming five years (Indian Investment Commission 2006a).
These projects are likely to generate flow-on opportunities in aviation transport services such as baggage handling, air traffic control, fire services and navigational technologies. Australia’s capabilities are recognised as world class in many of these areas. Airservices Australia has already had some success (see Chapter 4), and a number of other Australian companies are also interested in securing business in the air transport sector.
Several new, low-cost airlines have commenced operations in the past few years in response to rapidly growing demand from India’s burgeoning middle class (see Chapter 2). Yet India has limited skilled resources in a number of aviation services required by these and established airlines, who are streamlining cost structures. The aviation industry is consequently seeking outside assistance for a range of services, such as international standards compliance, manual design and management, compliance documentation, training, aviation security, ground handling and safety systems development. Melbourne consultancy, Aviation Compliance Solutions, has already begun assisting India’s aviation industry in this regard (see Chapter 4).
Ports The National Maritime Development Programme, announced in December 2005, envisages investment of Rs558 billion (US$12.7 billion) on ports sector projects through to 2011–12. Private sector investment in constructing, managing and operating berths and terminals is expected to account for two-thirds of overall investment in the Programme (Indian Press Information Bureau 2005a).
See www.nhai.org.
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Many multinationals and domestic players have been involved in new port development; they have also taken over and are operating existing port facilities. P&O Ports, for example, operates Mumbai’s new port, Nhava Sheva, the new deep water container port at Mundra, and the Chennai Container Terminal. Private sector participation has generally been in the form of a build-operate-transfer (BOT) model, with assets reverting to the port after the concession period. Up to 100 per cent foreign equity under the automatic route is permitted in projects involving construction and maintenance of ports and harbours. Ten-year tax holidays also apply.
Environmental infrastructure and services India also recognises the need to improve its environmental infrastructure, in areas such as waste treatment and water purification, but has only limited funding and management capacity. It is also yet to develop comprehensive R&D, design and technology capabilities in environmental services. Since the 1990s, municipalities have encouraged private participation in infrastructure environmental services, and foreign investment and joint ventures with foreign partners have been increasing (Sawhney and Chanda 2004; Box 3.1).
BOX 3.1: Sinclair Knight Merz
Australian engineering consulting firm, Sinclair Knight Merz, was the managing contractor for the Bangalore Water Supply and Environmental Sanitation Master Plan Project. The project aimed to improve local capacity for the delivery of water supply, sewerage and environmental sanitation services to Bangalore. Particular emphasis was placed on assisting the urban poor and other vulnerable groups.
Sinclair Knight Merz has also been engaged to carry out the civil, structural, mechanical and electrical engineering, and project management for the development of a large temple in the state of West Bengal.
Sourced from www.skmconsulting.com, accessed May 2006
Education and training services
Human resource development, at all levels, is arguably the largest challenge that confronts India on its path to development. As noted in Chapter 2, the best of India’s educational institutions have incredibly competitive entry requirements and excellent tuition by world standards. India’s major IT companies are investing very significantly in their own training efforts, in many cases establishing their own learning institutions. Despite this, and the relatively large number of graduates produced, skills shortages in the IT–ITES sector are still looming. Development of other sectors will necessitate still further development of the indigenous skills base. Assuming development proceeds according to plan, there is enough potential to keep both domestic and foreign providers busy for a very long time.
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Australia has been a popular, and rapidly growing, destination for Indian tertiary students, particularly those wishing to undertake postgraduate engineering and business management degrees. But potential exists for this pattern to change, both as competition heats up among Indian companies to recruit and provide in-house training to graduate engineers; and as demand grows for labour in other sectors where potential salaries do not provide the incentive to justify the expense of travelling overseas to undertake a degree. It seems increasingly likely that the major training opportunities will require foreign tertiary education and training providers to look at delivering their services on the ground in India.
No foreign universities have established campuses in India as yet, although a number are positioning for entry. A handful of foreign institutions have been involved in establishing non-university higher education campuses in India. They include the UK-based Wigan & Leigh which has set up a number of business-oriented campuses across India; the Western International University of the United States, which established the Modi Apollo International Institute in collaboration with the K.K. Modi Group; and the Kellogg School of Management, The Wharton School and the London Business School which have an association with the Indian School of Business.
A recent study found that at least 131 Indian higher education institutions have collaborative arrangements with foreign institutions, predominantly in the vocational area, notably business and hotel management programs. The majority of collaborations have involved ‘twinning’ arrangements, whereby part of the program is undertaken in each country. With foreign degrees offered in India (in‑country delivery) not recognised in India, the demand for such courses would appear to reflect the enthusiasm among Indian students for foreign degrees (Boston College 2005). A number of foreign universities, including the University of Southern Queensland and the University of South Australia, also provide distance education courses (see Chapter 4).
While most attention has been paid to the higher education sector, the number of collaborative arrangements in school education has been increasing. There are estimated to be more than 200 schools in which foreign schools and Indian partners collaborate on program delivery (oneworld.net 2006).
Overseas study Middle class interest in study abroad is growing. Study abroad is becoming more accessible with the increasing availability of credit. The number of Indians studying in Australia has consequently grown rapidly in recent years (see Chapter 4). Growth prospects are particularly strong, given the trend toward international student mobility. One forecast is for the demand for international higher education (encompassing overseas study, offshore campuses and distance education) to grow from 1.8 million students in 2000 to 7.2 million by 2025, with China and India generating over half the global demand (Böhm, et al. 2002). Australia’s share of global demand is forecast to increase from three per cent in 2000 to eight per cent (one million students) in 2025, 56 per cent of which is expected to be for onshore
See www.wiganindia.org, www.wiuindia.com and www.isb.edu.
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higher education in Australia. Some 800 000 students from India are projected to seek overseas study by 2025, with 80 000 wanting to study in Australia (IDP Education Australia 2005a).
The increasing numbers of international students enrolled in Australian institutions is helping to facilitate the recognition of Australian qualifications overseas. The Bar Council of India, for example, now recognises undergraduate law degrees from a number of Australian universities.
Commercial links Building on the many and varied educational linkages between Australia and India (see Chapter 4), Australian educational institutions have been actively appraising the Indian market. Australian universities are exploring opportunities for twinning with Indian universities as well as the establishment of a direct market presence (Downer 2005).
By 2025 offshore campuses and distance education programs are forecast to account for 44 per cent of the total global demand for Australian higher education (Böhm et al 2002). There will be potential opportunities for Australian institutions to be involved in the establishment of campuses in India – once there is clarity in the regulatory approach governing the presence of foreign higher education providers. Henry Ledlie, IDP Education Australia’s India country director, has noted that while Australian institutions may not be able to take 80 000 Indian students [as projected by Böhm et al], ‘there is certainly room for another Monash in India or a Curtin in India’ (IDP Education Australia 2005b). However, Australian educational institutions need to have something unique to offer before contemplating the establishment of campuses in India.
Australian education providers have also shown considerable interest in pursuing partnerships in vocational and technical education (VTE). While growing from a relatively small base, the number of Indian VTE students studying in Australia – principally hospitality and business courses – has increased by some 140 per cent over the past year. Compared with university education, VTE courses can be provided more readily in India.
In the trades, there is a relative lack of formal training and skills are typically passed from father to son. Accreditation standards are also lacking in many fields. In the case of nursing, while India has a large number of nursing colleges, many nurses have aspirations to work overseas. There may therefore be opportunities for Australian educational institutions to get involved in joint ventures delivering education programs to Australian and international standards.
TAFE Global, Australia and Tata Consultancy Services (TCS) concluded a deed of understanding in 2004 for the introduction of a skills training strategy aimed at the Tata group, the broader Indian workforce and internationally. Cooperation is envisaged in automotive, healthcare, white goods, and English language in the workplace. The parties agreed to explore delivering four projects to transfer the know-how and training quality standards, products and services of TAFE Global to the Indian training environment through TCS (TCS 2004). The agreement has not yet translated into commercial contracts, but TAFE Global has concluded memoranda of understanding with two other Indian parties for the provision of vocational training services.
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Tourism and travel-related services
Indian outbound tourism is expected to grow very strongly in the coming years. The World Tourism Organization forecast in 2002 that the number of outbound Indian travellers will reach 50 million by 2020 (Asia Times Online 2002). This represents an annual compound growth rate of over 12 per cent on the 4.6 million tourist numbers recorded in 2001, and in fact the number of outbound tourists has been growing at rates not too far short of this over recent years. International departures have grown from 2.2 million in 1992 to 4.6 million in 2001 (8.5 per cent compound annual growth), to an estimated 6.2 million in 2004 (10.5 per cent compound annual growth over 2001) (RBI 2002). These growth rates compare with World Tourism Organization forecasts of 4.1 per cent growth in worldwide international tourist arrival numbers through to 2020. Clearly, India is one of the fastest growing sources of tourists in the world.
In 2001, an estimated 25 million people, or 2.5 per cent of the Indian population could afford international travel (Department of Industry, Tourism and Resources 2005). Apart from India’s growing middle class, other factors have been facilitating the recent strong growth in Indian outbound tourism, notably the relaxation of foreign exchange transactions. Under the Foreign Exchange Management Act 1999 (FEMA), people travelling abroad as tourists or as students are entitled to obtain foreign exchange from authorised dealers up to a limit of US$10 000 per person in any one calendar year (double the previous limit). A limit of US$100 000 applies for persons travelling abroad for employment or emigration purposes. Changing mindsets, particularly among the younger, aspiring segments of the population, have also stimulated interest in travel abroad. In addition, credit cards and personal loans are increasingly popular. The deregulation of the aviation market has led to a plethora of new airlines and air services, which has helped accommodate growth in the tourism market.
Travel agencies and tour operators have proactively promoted foreign travel, while foreign tourism boards and international airlines have also been actively undertaking promotional activities. An increasing number of agents are starting to promote Australia as a destination (Tourism Australia 2005). Competition is tough however, especially among the larger travel agencies. While margins may be tight, foreign players consider it worthwhile to invest in the Indian market given its anticipated future growth.
Tourism Australia (2006) expects Australian providers to gain further market share in Indian outbound tourism over the coming decade, with average annual growth in arrivals from India of 15.6 per cent through to 2015, when visitor numbers are expected to top 290 000. Looking ahead to 2025, visitor numbers from India are predicted to grow to around 550 000, which would make India Australia’s seventh-largest source of visitors with a share of 4.2 per cent. Currently the share is a little over one per cent (Department of Industry, Tourism and Resources 2005).
The Indian domestic tourism sector is performing well below its potential, in large part reflecting a poorly developed tourism infrastructure. India’s share in world tourist arrivals is low – just 0.44 per cent in 2004 – although tourist numbers have recently been increasing quite rapidly (Indian Press Information Bureau 2005b). Its travel and tourism economy gross product is expected to grow at an average annual inflation-adjusted rate of 6.9 per cent over the ten years to 2015, the 11th fastest of all countries.
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Expenditure by international visitors on goods and services, adjusted for inflation, is projected to grow at 9.0 per cent, the 6th highest across all countries (World Travel & Tourism Council 2005). India will need to address a number of issues if such growth is to be realised, including air seat capacity, airport and other transport infrastructure, and availability of high standard hotel accommodation. An estimated 100 000 hotel rooms will need to be added over the coming five years (Indian Investment Commission 2006a).
A number of foreign providers have entered the Indian travel-related services sector in recent years, both to service the Indian tourist market as well as to capture some of the growing business in Indian outbound tourism. FDI in travel-related services with up to 100 per cent equity is permitted automatically. In addition to the opportunities the growth of Indian tourism brings for Australian travel agencies and tour operators, Australian service providers have developed substantial expertise in the provision of tourism-related advice, planning and management services.
The signing of an MOU in 2004 and a new Air Services Agreement in 2006 significantly increased the access of the two countries’ airlines to each other’s market, so providing a platform for expansion of two-way trade and investment in the tourism sector (Box 3.2).
BOX 3.2: qantas re-enters the indian market
After a two-and-a-half year hiatus, Qantas resumed air services to India in September 2004 with three services a week to Mumbai.
The new services coincided with the signing of an MOU and a new Air Services Agreement. In 2004, access for the airlines of both countries increased from 2100 seats each way each week to 4500 seats between Australia’s four main gateway ports of Sydney, Melbourne, Brisbane and Perth and four major ports in India: New Delhi, Mumbai, Kolkata and Chennai. Capacity had increased to 6500 seats per week by October 2006, and Australian and Indian carriers had gained access to two additional ports in India and Australia respectively. The introduction of multiple designation (‘open skies’) has allowed an unlimited number of airlines to operate between the two countries. More liberal code-sharing arrangements were agreed which will provide airlines greater flexibility in serving the market. Open freight arrangements with unlimited capacity and open routes were also agreed.
Qantas currently offers three non-stop flights per week from Mumbai to Sydney, and offers connections from New Delhi, Bangalore, Hyderabad, Chennai and Ahmedabad. Although traffic is growing strongly, India is continuing to prove a difficult market for Qantas in the face of strong competition from hub carriers such as Singapore Airlines and Malaysian Airlines, which serve multiple cities in India and are able to offer connections with their Australian services at their hubs. In a bid to build a strong and viable presence in the market, Qantas entered into a codeshare arrangement with Jet Airways in August 2006 to significantly increase the frequency of flights between multiple points in Australia and Mumbai and New Delhi via Singapore.
Sources: Anderson 2004; discussions with David Hawes, Group General Manager Government and International Relations, Qantas; Qantas India website (http://www.qantas.com.au/regions/dyn/in/home, accessed December 2006)
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Film and television
The audio-visual and related services sector has been reformed considerably. It was largely under public ownership prior to the 1990s, with the exception of film production, distribution and exhibition. The government’s monopoly on the import of foreign films was removed in 1992 and a range of qualitative restrictions on film imports were removed in 2002 (Mukherjee 2002). The film, television and radio sectors are all open to foreign investment and a number of foreign investors have entered the market (IBEF 2006b).
India’s entertainment industry is projected to grow at a compound annual growth rate of 21 per cent to reach Rs617 billion (US$13.6 billion) in 2010, up from Rs201 billion (US$4.4 billion) in 2004 (PricewaterhouseCoopers 2005a). The film and television sectors are expected to grow at 18 and 24 per cent a year respectively, to reach Rs153 billion (US$3.4 billion) and Rs427 billion (US$9.4 billion). Factors leading to buoyant growth include increasing numbers of pay TV homes and multiplexes, evolving efficiencies in distribution, advancements in and better use of technology, industry corporatisation and consolidation, and reductions in entertainment tax in some states from their previous high levels (PricewaterhouseCoopers 2005a, Ernst & Young 2004). Entertainment taxes varied between 14 and 167 per cent in 2002 (Mukherjee 2002).
The cable industry forecasts the number of households with television to rise from 79 million in 2002 to 134 million in 2010. The number of cable and satellite households is expected to reach 94 million by 2010, up from just 35 million in 2002, making India one of the largest cable markets in the world (Zee Television 2003).
Indian film producers are focusing more on state-of-the-art technologies in cinematographic equipment, post-production, and exhibition. Modern multiplex and digital cinemas are also springing up everywhere, partly spurred by the five year tax exemption on 50 per cent of profits from building, owning and operating multiplex cinemas constructed between April 2002 and March 2005. Likewise, in the television and cable industry, broadcasters are investing in the latest technology and additional services. These developments and liberalisation are spurring foreign investment (Austrade 2006c).
The international audience for Indian films is growing, as is the interest of Indian film-goers in foreign films and influences. This is encouraging producers to co-produce with overseas filmmakers and to include exotic locales in their films, television serials and commercials. Australia remains a popular destination for Indian productions and awareness of Australia among Indian filmmakers is only likely to increase now that Australia Network, Australia’s television service in the Asia Pacific region, is available in India (see Chapter 4). Demand for Australian film post-production services is also likely to grow.
See Income Tax Act, 1961, Section 80-IB (available at www.taxmann.net).
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Sports and related infrastructure
A number of Australian companies are positioning themselves to win business in connection with the Delhi 2010 Commonwealth Games. The Delhi Games will be India’s largest sporting event since the 1982 Asian Games. India will be seeking collaboration from countries with experience in hosting major games events. India has also signalled its wish to host the 2016 Olympic Games.
Australian companies have competencies in design, architecture, engineering, environmental management, as well as games operations and management and related services. Many Australian companies have, on the back of their involvement in the 2000 Sydney Olympics and 2006 Melbourne Commonwealth Games, built up particular strengths in contracting in the context of complex major sporting events.
An Australia–India Council-sponsored sports- and related-infrastructure forum took place in India in November 2005, with 18 Australian companies participating. The Victorian Government has since led a building, infrastructure and related services mission to India, with the Delhi Games being a major focus. The Victorian and New South Wales governments in 2006 jointly established an Australian International Sporting Events Secretariat to promote the expertise developed by both states from hosting the Sydney Olympics and Melbourne Commonwealth Games (Brumby 2006).
Healthcare services
The healthcare services sector appears poised for buoyant growth, particularly in the increasingly prominent private sector. Healthcare sector revenues are projected to increase from around US$30 billion in 2004–05 to US$60 billion by 2010, representing growth of 15 per cent a year (Indian Investment Commission 2006a). By one estimate, the public healthcare system will be able to meet just one tenth of the demand for additional hospital beds over the coming three or four years. Moreover, the Indian Healthcare Federation estimates that domestic investors will be in a position to meet only about one-half of the required investment in the sector over the next 8–10 years, pointing to significant opportunities for foreign investors (IBEF 2004).
Changing demographics, increasing disposable incomes and changing lifestyles are driving the burgeoning demand for healthcare. The percentage of the population 55 and above will increase to 12 per cent by 2010. The percentage of the working age population will also grow over the coming years. Increasing per capita incomes and a larger number of two-income families are spurring demand for health services among the middle- and higher-income groups. The share of health in private final consumption expenditure increased from 3.5 to 5.3 per cent over the 1993–04 to 2001–02 period. As more and more Indians adopt Western lifestyles, the incidence of diabetes and cardio-vascular diseases is increasing. With a greater awareness of health issues and greater financial means, Indian consumers are increasingly seeking out preventive healthcare services. Health insurance cover is beginning to take off (IBEF 2004).
P A G E 62 Opportunities for Australian Services Providers in India
The number of private sector companies owning and managing hospitals has grown rapidly in recent years. A number of hospitals and other healthcare operators have formed alliances with foreign companies with a view to tapping their capabilities and expertise in the provision of healthcare services. Australian companies have capabilities in a range of healthcare service areas where India has a need for expertise, as demonstrated by Aus Health International and AWS Clinical Waste’s successes in the Indian market (see Chapter 4). Capabilities that are in particular demand include health insurance, new hospital and diagnostic centre projects, as well as training and consulting services.
RESEARCH
There is strong scope for partnering and collaboration in numerous research fields, notably in biotechnology but also in areas such as nanotechnology and bioinformatics.
Measured in terms of numbers of biotechnology companies, India had the 11th largest biotechnology sector in the world in 2005, with around 100 companies (Ernst & Young 2005b); Australia was ranked 5th. India’s biotechnology industry has the potential to generate US$5 billion in goods and services revenues by 2010, up from US$700 million in 2003–04. Clinical development services revenues could exceed US$1.5 billion; bio-services or outsourced research services could reach US$1 billion; and agricultural and industrial biotechnology could account for US$500 million. Each year, India turns out nearly half a million graduates with degrees and diplomas in biotechnology, bio‑informatics and the biological sciences (Indian Department of Biotechnology 2005).
Anticipating the Indian biotechnology market to reach half the size of the US biotechnology market within the space of 20 years, Australian biotechnology industry body, AusBiotech signed an MOU with India’s peak biotechnology industry body, the Indian Association of Biotechnology Led Enterprises (ABLE), in October 2004 (AusBiotech 2004). The MOU aims to strengthen ties and develop further biotechnology partnering and collaborative opportunities. AusBiotech notes the complementarities that exist. India has made some significant investments in biotechnology, has a large skills base and offers development and market potential across several biotechnology sectors. For its part, Australian industry has a track record in innovation.
Nanotechnology and bioinformatics are two areas at the interface of biotechnology and information technology where both countries have strengths. An Indo–Australian Conference on Nanoscience and Nanotechnology was held in Bangalore in March 2006. There has also been a proposal to establish an Australia-India Nanotechnology Centre at the University of New South Wales (UNSW 2005).
Prime Minister Howard announced a new A$25 million bilateral research and fellowships program and a new MOU on biotechnology was signed during his visit to India in March 2006, further enhancing scope for multi-disciplinary research and technology cooperation between the two countries. The new MOU will complement existing agreements between Australia and India in science and technology and education and training signed in 2003.
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Mining services
Australian exports of mining technology services globally were expected to reach A$1.24 billion in 2004–05. Over 60 per cent of the world’s mining software is written in Australia (Minerals Council 2005). The Indian mining industry is becoming more aware of Australian capabilities in mining technology and other services areas, with Xstrata, Ludowici, Mincorp and JK Tech already operating successfully in India (see Chapter 4).
Opportunities exist to supply mining technology and services for exploration, software and systems, safety, environmental management, communications and training. India is looking for state-of-the-art technological and management expertise, which can improve productivity through good planning and design of mines, cost reduction, and optimisation of smelting and refining operations and by-product recoveries (Austrade 2006d).
For the present, regulatory regimes are largely precluding foreign mining company investment in mine development in India, but mining policy is currently under review. When the restraints on FDI are removed, Australian mining service companies can be expected to follow the miners in a major way. retail
Retail consultancy Technopak predicts that India’s retail sector will increase in size from US$300 billion in 2006 to US$427 billion by 2010 and US$637 billion by 2015. At least 2.5 million additional jobs are likely to be created in retail by 2010. Organised retailing in India is growing particularly strongly and is projected to reach US$60–75 billion by 2011–12. The retail supply chain alone is expected to benefit from investments amounting to around US$22 billion (Technopak 2006).
Australian retailers have developed significant expertise in the modern retailing systems and practices that will be required by Indian companies scrambling to establish organised retailing ventures. The growth in the organised retail sector could provide additional opportunities for Australian retailers if foreign investment laws are further relaxed. Woolworths concluded a deal to provide Tata Group’s recently announced Infiniti retail venture with technical support and strategic sourcing facilities from its global network. While Woolworths has no equity stake in Infiniti, the detail will reportedly be revisited if the Indian Government loosens restrictions on FDI in the retail sector (The Hindu Business Line 2006c).
Technopak (2006) estimates an additional 600–700 million square feet of retail space will be required by 2011. Based on current projections of mall construction there will be a shortfall of 400–500 million square feet. An estimated US$10–15 billion will be needed to make good this shortfall, with additional investment of US$8–10 billion required in retail fit-outs and related equipment. Australian project developers, architectural firms and engineering consultancies – many of whom are already involved in India – are well placed to participate in the planning, design and construction of this additional retail space.
P A G E 64 Opportunities for Australian Services Providers in India
Logistics
The rapid growth in organised retailing is rapidly changing the logistics landscape. India’s fragmented logistics sector offers opportunities for more efficient Australian operators with sophisticated capabilities in supply chain management, refrigerated containers and cold storage to enter the market. Linfox recently commenced operations in India and is working with potential customers to solve their supply chain issues (Linfox 2006). Toll Holdings aims to become the pre-eminent integrated logistics provider in the Asian region. Its recent acquisition of a 60 per cent shareholding in Singapore’s SembCorp Logistics, with its transportation and warehousing network stretching across 15 countries including India, is a key element of its strategy (Toll Holdings 2006).
PROFESSIONAL SERVICES
The Australian Government is working with Australian business to open opportunities in professional services in India, including legal and accountancy services. The growth of the Indian economy has fostered demand for qualified and suitably experienced international lawyers and accountants to service the needs of foreign investors in India and Indian multinationals and Indian exporters of capital, goods and services. There is also demand in India for internationally qualified lawyers and accountants to support Indian companies acquiring assets abroad, especially in the resource and information technology sectors. While India’s legal and accounting professions are resistant to reform and market opening, there is growing acceptance within the Indian Government of the benefits of greater foreign participation. Any liberalisation is likely to be gradual.
In WTO services trade negotiations, Australia is seeking a commitment from India on legal services covering advisory services in foreign law, which would enable Australian lawyers to enter into voluntary forms of commercial association with Indian lawyers and law firms, and employ or be employed by Indian lawyers. Australia is also pushing for commitments on commercial presence to enable Australian accountants to establish offices in India and provide a full range of accountancy services. Gradual opening of these professional services markets in this way would encourage foreign investment, better enable Indian companies to take advantage of international business opportunities, and expose Indian legal and accounting firms to international best practice.
P A G E 65 P A G E 66 C h a p t e r 4
the bilateral economic relationshipI
KEY POINTS
• Australian business is beginning to capitalise on India’s economic emergence.
– Growth in India’s services sector has fuelled a growth in demand by India for Australian services, particularly in education.
– Australia currently runs a significant surplus in services trade with India.
• India has been Australia’s second-fastest growing services export market over the past five years.
– India is now the second-largest source country for international student enrolments.
– Visitor numbers from India have grown rapidly over recent years.
• Australian companies are also taking advantage of emerging export opportunities in engineering, infrastructure design, healthcare and mining services.
• While presently at modest levels, the level of Australian direct investment in India is set to increase with some recent investment decisions and conclusion of contracts.
• Dozens of Indian information technology companies have a significant and growing presence in Australia, which is generating employment, collaborative initiatives and export opportunities for Australian companies.
• The Trade and Economic Framework Agreement signed in March 2006 provides an important basis for the facilitation and future development of the bilateral trade and economic relationship.
– A number of state governments have also identified India as a strategic market.
– Business associations and chambers of commerce, notably the Australia India Business Council (AIBC), play an important role in showcasing business opportunities in India.
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‘Australian companies have undoubtedly discovered India. But it is highly likely that the growth is only just beginning’ (AFR 2006a) overview of the relationship
Australian services providers looking to capitalise on the opportunities highlighted in Chapter 3 have an increasingly solid base of commercial activity upon which to build. India’s importance to Australia as a trade and economic partner has grown enormously over recent years. In 2005–06 India was Australia’s 11th largest overall trading partner – up from 18th in 2000–01. Total trade was worth A$10.4 billion. Total Australian exports to India exceeded A$8.8 billion.
India is Australia’s fastest-growing major merchandise export market, with exports growing at a trend rate of over 31 per cent over the past five years. Merchandise exports were valued at A$7.4 billion in 2005–06, making India Australia’s seventh-largest export market with 4.9 per cent of total exports. Together coal and gold accounted for 83 per cent of the total growth in exports over the 2000–01 to 2005–06 period and 72 per cent of total merchandise exports in 2005–06. Increased coal sales have reflected increased demand for resources to fuel India’s fast-growing economy. Changes in Indian regulations governing gold imports have precipitated strong demand for Australian non-monetary gold, driven by increased jewellery production in India. As India’s economy adjusts to greater openness to trade in both industrial products and services, diversification of the bilateral commercial relationship can be expected.
Bilateral services trade, though somewhat smaller, is growing rapidly. In 2005–06, Australia’s services exports to India were valued at A$1.4 billion. With a 23.2 per cent trend growth rate over the past five years, India has been Australia’s fastest-growing services export market after China. Exports increased by 36 per cent in 2005–06, pushing India up into ninth place as a services export market for Australia. Imports of services from India were valued at A$348 million in 2005–06, making India Australia’s 21st largest source of services imports.
According to Australian statistics, the stock of Australian FDI in India across all sectors was A$47 million at the end of 2005 (ABS 2005b). The Indian data shows cumulative FDI inflows, excluding re-invested earnings, of US$160 million from Australia between August 1991 and April 2006 (Indian Department of Industrial Policy and Promotion 2006). Estimates based on foreign investment approvals are substantially higher still. According to the Federation of Indian Chambers of Commerce and Industry, for example, Australia is India’s eighth-largest overseas investor with over $1 billion approved for around 140 joint ventures. While estimates of Australian investment in India vary substantially depending on the methodology applied, it is clear that Australian companies have been actively pursuing investment opportunities, with SMEC International (Box 4.1), ANZ Bank (technology operations in Bangalore) and Orica (explosives business) among the highest profile investors. The level of investment is set to increase, with a number of investments in the services sector as well as manufacturing sector investments being undertaken by Bluescope Steel and Mayne Pharma.
Data from the ABS and Department of Industrial Policy and Promotion statistics on foreign direct investment are not directly comparable. Cumulative foreign direct investment inflows is a very rough proxy for the stock of investment, as it does not take into account market valuation and exchange rate movements.
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BOX4.1: smec international
The Australian consulting firm SMEC International has particular strengths in the application of IT to natural resource management. Over the past 15 years, it has undertaken a number of major infrastructure projects in India involving highways, irrigation and water resource management. It has ten project offices in India and over 600 staff in country under its 100 per cent owned local subsidiary, SMEC India. SMEC is also drawing increasingly on its staff in India for projects elsewhere in Asia. SMEC’s recent and current projects include:
• a A$5 million contract for preparation of a Decision Support System to guide future water allocation and investment decisions across the Gangetic Plains of Uttar Pradesh. The project involves the application of software to map and model water allocation generally, including the irrigation system, groundwater, crops, wetlands and socio-economic indicators;
• a A$3 million World Bank-funded consulting contract to prepare an institutional strengthening and reform roadmap for the massive Uttar Pradesh Irrigation Department (UPID) with close to 100 000 staff. The project aims to achieve structural, policy and capability reforms to enable the Department to deal with emerging water sector management challenges in India’s most populous state and one of its poorest;
• a contract with the Public Works Department of the state government of Kerala for capacity- building and modernisation initiatives, aimed at achieving sustainable improvement in the efficiency and effectiveness of transport infrastructure management in Kerala;
• a contract with the Public Works Department of the state government of Karnataka for the provision of project management and construction supervision services in connection with a major upgrading program for 1000 km of state highways; and
• an MOU with the Power Trading Corporation of India Limited, the Indian government agency responsible for the co-ordination of the electricity market and the purchase of energy from private suppliers. This opens the way for the sale of electricity from the West Seti hydropower plant that SMEC International is proposing to develop in the Far Western Region of Nepal.
SMEC has also been actively involved as a supervising consultant for stretches of road being constructed and upgraded as part of the National Highways Development Project, including the World Bank- and Asian Development Bank-funded stretches of road in Bihar, Jharkhand, Rajasthan, Orissa and Haryana.
With many years experience in India and the countries of the region, SMEC has built an appreciation of local needs and what would be an ‘appropriate solution’, taking account of the situation on the ground, local technical skills and the social and political context. SMEC also places emphasis on capacity building by involving client personnel in their development work.
Source: www.smec.com.au and discussions with Pankaj Patel, General Manager Environment & Planning, SMEC.
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Separate statistical data on the level of Indian direct investment in Australia are not available. It is concentrated in the IT (see sub-section on ‘Indian direct investment in Australia’ below) and resource sectors (construction of an ammonia plant by the Oswal Group for approximately A$630 million and copper mines acquired by Birla and Serlite in Queensland, Western Australia and Tasmania). Invest Australia estimates Indian investment in Australia to be worth around A$1 billion, which would make Australia the ninth-most important destination for Indian FDI.
Trade in services
Australia’s services exports to India Australia’s A$1.4 billion-plus services exports to India are dominated by education (described in the statistics as ‘education-related travel services’) which accounted for 70 per cent of total services exports in 2005–06. Other personal and business travel amounted to A$181 million in 2005–06 while the remaining commercial services exports were valued at A$249 million (Figure 4.1).
F i g u r e 4 . 1 Education the lion’s share of services exports
Breakdown of exports of services to India, 2005–06 (A$ million)
Government services, 4 Business, 71
Other commercial services, 189 Personal – education-related, 985
Transportation, 56
Personal – other, 110 Travel, 1166
Source: ABS 2006a.
Total Indian investment in Australia at the end of 2005, including portfolio and other investment, was estimated by the ABS to be A$258 million (ABS 2005b).
P A G E 70 The Bilateral Economic Relationship
Education services Education exports in 2005–06 were valued at A$985 million; more than double their value in 2003–04. India became the second-largest market (after China) for the export of education services in 2005 (Figure 4.2), up from eighth position in 2002. Between 2003 and 2005, Indian student enrolments almost doubled to around 28 000, far outpacing the growth of other major markets. For the 11 months to November 2006, there were more than 38 700 Indian student enrolments in Australian educational institutions. Australia is the second-most popular destination for Indians enrolled in higher education institutions overseas, after the United States.
India, China and the Republic of Korea have been the major sources of growth in the higher education sector as well as in the vocational and technical education sector.
F i g u r e 4 . 2 India: a large and growing source of students Australia’s top ten markets for international student enrolments for the 2005 calendar year, and growth on previous year
120 40 Enrolments 2005 calendar year 35 100 Growth on previous year 30 25 80 20 15 60 10 5
Enrolments (’000s) 40 0 -5
20 Growth on 2004 (per cent) -10 0 -15 India Other China Japan Republic of Korea Malaysia Thailand Indonesia Singapore Hong Kong United States
Source: AEI 2006b. Note: Overseas students undertaking short English language courses not requiring a student visa are excluded from the statistics.
The student fees component was estimated at A$230 million in 2004, ranking India third behind China and Malaysia.
P A G E 71 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
In 2005, 80 per cent of all Indians studying in Australia were enrolled in higher education institutions (AEI 2006a). Indian students accounted for almost 14 per cent of all international student enrolments in Australian higher education in 2005, but just 8.0 per cent of international student enrolments at all levels of education. Popular fields of higher education include business administration and management, information technology and engineering. Biotechnology, communication studies, and art and design are becoming increasingly popular. India is the top-ranked source of overseas postgraduate students in Australia, as well as the largest source of computing, science and engineering students.
The majority of the remaining Indian students undertaking studies in Australian educational institutions are enrolled in vocational and technical education (VTE). VTE student enrolments have increased rapidly, up from around 1400 in 2003 to around 3900 in 2005, mainly in hospitality, services and transport. The number of Indian students undertaking English language courses in Australia has also grown strongly, with student enrolments increasing from less than 100 in 2002 to around 1300 in 2005.
Rapid growth in education exports has been facilitated by the forging of institutional links between Australian education providers and their Indian counterparts. An agreement was concluded in 1999 between the Australian Vice-Chancellors’ Committee and the Association of Indian Universities to cooperate in a number of areas. A growing number of universities in the two countries have since been establishing their own agreements or memoranda of understanding in particular fields (Box 4.2).
A number of foreign institutions have established credit transfer / ‘twinning’ arrangements with Indian counterparts. Several Australian universities also provide courses online via distance education over the Internet. The University of Southern Queensland offers online MBA studies to students in India. The University of South Australia similarly offers an online master’s degree in Information Technology (Techbizindia.com 2005). The University of Wollongong has an MOU with Wipro, a leading Indian information technology company, to provide strategic direction for a partnership in the area of information technology services (The Hindu Business Line 2004).
A visit to India in February 2006 by Australia’s ‘Group of Eight’ universities was aimed at raising the profile of Australian education and research and building linkages.
Linkages are also being forged outside the higher education sector. Melbourne-based franchise company Kangaroo Kids recently opened seven new high schools in Mumbai in addition to its 35 pre‑schools already operating in 12 cities across India (Austrade 2005). The Australian School, which offers students the opportunity to obtain the Western Australian Certificate of Education, also recently opened in New Delhi (123India.com 2004).
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BOX 4.2: examples OF AUSTRALIAN university linkages with indian counterparts
In 2001, the Department of Computer Science and Computer Engineering at La Trobe University signed a twinning agreement with CMTES Informatics, a private provider of computer training courses in India, to deliver the first part of its Master of Information Technology course in Hyderabad (La Trobe University 2002).
Monash University, in collaboration with BHP Billiton, is establishing a joint institution for scientific research with the Indian Institute of Technology Mumbai (IIT Mumbai). The University of New South Wales (UNSW) has entered a partnership with IIT Mumbai to develop collaborative research programs in computer science (Howard 2006a). UNSW has MOUs with Jawaharlal Nehru University and the University of Pune, focused on collaboration in research, student and staff exchanges and education projects (DFAT 2005). It has established offices in New Delhi and Mumbai.
The University of Queensland concluded a research collaboration agreement with Manipal Academy of Higher Education, one of India’s top medical schools, in 2004. It also negotiated a PhD student exchange program with Jawaharlal Nehru University in 2003 (University of Queensland 2004).
An agreement between Southbank Institute of TAFE and the Institute of Hotel Management Bangalore, and another between the Queensland University of Technology and the Indian Institute of Information Technology in Bangalore, were signed during Premier Beattie’s 2004 visit to India (Queensland Department of Premier and Cabinet 2004). The Queensland University of Technology also signed an MOU with the Madras Institute of Technology during Prime Minister Howard’s March 2006 visit to India (Howard 2006b). Queensland University of Technology’s School of Mechanical, Manufacturing and Medical Engineering also has an MOU with the Vellore Institute of Technology in the state of Tamil Nadu (Queensland Department of Premier and Cabinet 2004).
In 2004, the University of Sydney established five Visiting Research Fellowships, designed to establish and encourage research links with leading Indian researchers (University of Sydney 2004).
The University of Melbourne has developed a variety of linkages with leading Indian academic institutions, including through an MOU with the Indian Institute of Science, Bangalore focused on biotechnology and through research collaboration on topics such as grid technology research, Indian economic policy, and prevention and control of HIV/AIDS. The University plans to open a liaison office in Bangalore in early 2007.
Based on correspondence in December 2006 with Professor Frank P Larkins, Deputy Vice Chancellor (International), the University of Melbourne.
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Tourism India was Australia’s 14th-largest inbound tourist market in 2005–06, with 79 000 short-term visitor arrivals, up 33 per cent on the 59 000 recorded in 2004–05 (ABS 2006b). The average annual growth in visitor numbers over the decade to December 2005 was 13.2 per cent. Annual growth in short- term visitor arrivals from India outstripped the overall average from all countries over the decade and rebounded particularly strongly since the worldwide decline in tourism precipitated by September 11 (Figure 4.3). Strong growth in Indian visitor numbers looks set to continue. During the ten months to October 2006 around 69 000 short-term visitors from India arrived in Australia, a 25 per cent increase on the 53 000 that visited in the corresponding period of 2005 (ABS 2006b).
F i g u r e 4 . 3 Rapid growth in visitor numbers from India
Annual growth in short-term visitor arrivals from India and from all countries
30 India World 25
20
15
Per cent 10
5
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 -5
-10
Source: ABS 2005a.
Short-term visitors from India contributed A$280 million to the Australian economy in 2005, an increase of 54 per cent on the previous year. The long average stay, at 46 nights, reflects the fact that many Indians come to Australia to visit friends and relatives (13 000 in 2005, out of 68 000 total visitors). Visiting friends and relatives, including those studying in Australia, would also be a motivating factor for many of those stating they came to Australia for a holiday (27 000) (Tourism Australia 2006).
Despite gaining market share in Indian outbound tourism over recent years, Australia’s share remains low, at a little over 1.0 per cent. During a September 2005 visit to India by the Australian Minister for Small Business and Tourism, Fran Bailey, Australia and India agreed on an Action Plan to assist in fast-tracking tourism growth between the two countries. Key elements of the Plan included research and training cooperation in ecotourism, the sharing of expertise and the holding of a Tourism Business
Measured in terms of Total Inbound Economic Value (TIEV).
P A G E 74 The Bilateral Economic Relationship
Forum during the Melbourne Commonwealth Games in March 2006 (Bailey 2005). During the forum, Minister Bailey and India’s Minister for Tourism and Culture, Ambika Soni, agreed to pursue opportunities in ecotourism, food tourism, enhancement of heritage sites and investment in infrastructure (Bailey 2006). The Australian Government has also moved to adopt a strategic approach to the sustainable growth of the Indian tourism market with the launching of an ‘Emerging Markets’ strategy, which forecasts the number of annual visitors from India to reach 550 000 by 2025, and the economic value of Indian inbound tourism to increase by 890 per cent to A$2 billion by 2025. (Department of Industry, Tourism and Resources 2005). The Department of Immigration and Multicultural Affairs introduced an electronic visa application facility for short stay visitor visas to the India market on 21 August 2006. This allows ‘Aussie Specialist’ agents in India to submit an electronic visa application (via the internet) for their clients, thus reducing application delivery and processing times.
Other Commercial Services Australian companies are beginning to take advantage of emerging services export opportunities in India, outside of the education and tourism sectors. Other commercial services exports from Australia to India (including transportation) grew by 46 per cent between 2004–05 and 2005–06 from A$171 million to A$249 million, and have more than trebled since 2002–03 (ABS 2006a).
Numerous Australian engineering consultancies and infrastructure design companies are involved in the upgrading and modernisation of India’s transport infrastructure (Box 4.3 contains examples). The increasing importance accorded to infrastructure development by the central and state governments alike is generating flow-on opportunities for Australian service providers. In the air transport sector for example, Airservices Australia is providing safety management systems and air traffic management training at Delhi and Mumbai international airports for the Airports Authority of India (Airservices Australia 2005). Aviation Compliance Solutions reportedly secured contracts, including with Air India, to provide aviation compliance and safety services to the fast-growing Indian market (AFR 2006b).
Australian design and software capabilities are also being recognised in India. Ford Australia designed and engineered a new Fiesta specifically for the Indian market, which was launched in the fourth quarter of 2005 (Ford 2005). Australian software company, Securities Markets Automated Research Training and Surveillance (SMARTS), supplied its stock market monitoring solution to the Indian national securities regulator, Securities and Exchange Board of India (SEBI) (Invest Australia 2005b).
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BOX 4.3: examples OF AUSTRALIAN COMPANY INVOLVEMENT IN INDIA’S INFRASTRUCTURE SECTOR
Australian companies are actively participating in the modernisation of India’s infrastructure. From the State of Queensland alone, companies that have won infrastructure-related business include:
• Engineering consultancy Cullen Grummitt and Roe, which secured a number of projects in India associated with port sector development. It is doing the design work for the extension of a wharf in Mundra Port, Western India while its Indian partner, Simplex Concrete Piles, is undertaking the construction work. It has also designed port terminal facilities at Chennai, Kandla, Tuticorin and the Nhava Sheva Port and Jawaharlal Nehru Port in Mumbai. CGR established an office in Mumbai in 2005.
• Civil, structural and environmental engineers and planners, Burchill Partners of the Gold Coast, who have been responsible for the planning and infrastructure design of the city at Amby Valley, a residential project near Mumbai being constructed by Sahara India.
• Infrastructure design company Maunsell (part of the AECOM Group), which supplied design and safety systems for the Delhi metro system.
• Union Switch and Signal Asia Pacific, which installed state-of-the-art safety control systems for India’s Southern Railway and South Eastern Railway, valued at several million dollars. Union Switch and Signal Asia Pacific has market responsibility in the Asia Pacific Region for the Ansaldo Signal NV group.
Source: Queensland Department of Premier and Cabinet 2004.
Australian companies have been involved in projects aimed at strengthening India’s health system. Aus Health International secured a project focused on improving the institutional framework for policy development in the state health system, as well as strengthening management and implementation capacity, performance improvement and technical supervision. The company was also involved in planning aspects for a 300-bed speciality hospital with corporate governance and contemporary management practice. AWS Clinical Waste recently won a World Bank contract for the design and installation of clinical waste treatment plants in 22 district hospitals in West Bengal (Queensland Department of Premier and Cabinet 2004). The 2006 Australian Exporter of the Year, ResMed, exports medical products to India that are used to treat sleep-disordered breathing and other respiratory disorders (ResMed 2006).
In the past four years Australia has gained in popularity amongst Indian filmmakers as a film location, reflecting both the growing international audience for Indian films and a growing interest among Indian film-goers in foreign films and influences. Since 1998, over 40 Indian films have been shot in
See www.ahi.com.au.
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Australia (Austrade 2006c). Salaam Namaste, released in September 2005, was the first Indian movie entirely shot in Australia (The Australian 2005a). It was the highest-grossing Indian film overseas in 2005 and did well in the Indian urban market. Australian film post-production services have also been in demand.
Industry links arising from strong growth in exports of mineral products to India are helping to foster an awareness of Australian capabilities in the mining industry more broadly. Australian mining software and technology services are much sought after by Indian industry. Xstrata’s Australian-based technology business has helped India’s Sterlite Industries to build an ISASMELT furnace, which is now operational. It has also supplied Sterlite with its IsaProcess copper refining technology. Some smaller Australian companies, notably from Western Australia and Queensland, have also established a foothold in areas such as mining software and mining systems development. For example, Queensland mining services firm JK Tech has recently supplied mineral processing technologies to Hindustan Zinc (Queensland Department of Premier and Cabinet 2004).
India’s services exports to Australia According to official statistics, personal non-education-related travel to India is by far Australia’s most significant services import from India (A$195 million in 2005–06). While short-term departures to India have not grown as fast as the number of visitors from India over the past decade, they have grown more rapidly in recent years – at a robust average of 37 per cent over the three years to 2005–06 (ABS 2006b, 2005a, 2004b).
The Australian Bureau of Statistics (ABS) estimates imports of computer and information services and other business services from India to be worth A$75 million in 2005–06 (A$35 million in 2002–03). The Indian data on exports to Australia of computer services (excluding exports of companies engaged exclusively in business process outsourcing activities) is higher, perhaps owing to the fact that it includes revenues derived by the Australian subsidiaries of Indian companies (see Section on ‘Indian direct investment in Australia’ below). The RBI estimates computer services exports to Australia at Rs4.48 billion (A$164 million) for the 12 months to March 2003 (RBI 2005c). services investment
Australian direct investment in India The level of Australian investment in India’s services sector is set to increase with some recent investment decisions and conclusion of contracts. Several Australian companies have established an on-the-ground presence in India to capitalise on emerging market opportunities, particularly in medical services (Box 4.4 below), construction, infrastructure, mining services, telecommunications, banking and insurance.
ABS data on exports are collected to standards set out in the fifth edition of the IMF Balance of Payments Manual (BPM5) which incorporates Mode 1 (conventional cross-border supply), Mode 2 (consumption abroad) and Mode 4 (movement of natural persons) (excluding salaries and wages). RBI data on computer services exports incorporate Mode 3 transactions (trade by foreign affiliates), which are not recognised as exports under BPM5.
P A G E 77 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
BOX 4.4: IBA health
IBA Health develops advanced information systems for clinicians and hospitals around the world. Their software solutions link clinical, administrative and departmental systems across the whole spectrum of health services. In Australia, more than 180 private and public hospitals use IBA Health solutions for administration and business support. IBA Health has operations in South East Asia, South Africa and the Middle East, and most recently in India.
IBA Health acquired the Bangalore-based Indian company, Medicom Solutions, in late 2005. The acquisition gave them a quick entry into the fast-growing Indian market and access to Medicom’s R&D capability. IBA Health’s intention is to consolidate all its development work in Bangalore and to develop the business there into a centre of excellence servicing its growing international business.
IBA Health’s main focus in the Indian market will be private hospitals. The private hospital sector is becoming increasingly important as incomes rise and as increased availability and affordability of insurance has increasingly made private healthcare more affordable.
IBA Health chose to develop an in-house operation in India rather than outsource their IT needs because of the greater scope this afforded for managing the development work undertaken. The operation requires managers from head office to be present on the ground so as to ensure their software is configurable and flexible enough for selling into other markets, not just India.
In gaining the necessary approvals to invest in India, IBA Health found that that the Indian authorities recognised that the approvals process is an important issue for foreign investors, and consequently were making efforts to streamline procedures. Visa applications were also processed without delay. More broadly, IBA Health’s experience has been that Australians – both corporates and individuals – are very welcome in India.
While Bangalore is beset with infrastructure difficulties, the infrastructure in Bangalore’s Electronic City is relatively good. IBA Health has nonetheless installed a power back-up. The company also recognises the clustering advantages of operating an IT development centre from Bangalore’s Electronic City. In addition, there are free trade zone-type benefits from operating in Electronic City and more administrative transparency compared with other parts of India.
Source: www.ibatech.com and discussions with Dr Brian Cohen, Chief Technology Officer, Asia, IBA Health.
Australian project development companies have begun to make significant investments in India. Clough Limited announced in January 2005 the signing of a US$131 million (A$170 million) contract with BG Exploration and Production India Limited to develop three new platforms and associated pipelines in the shallow-water Panna oil field and the South Tapti gas field located north-west of Mumbai (Clough 2005). Clough is also currently undertaking work for the major G1-GS15 Deepwater Development located off the East Coast of India for India’s Oil and Natural Gas Corporation (ONGC). The scope of work includes the design, procurement and installation of a new onshore gas plant, an
P A G E 78 The Bilateral Economic Relationship
additional shallow water wellhead platform, and a five-well sub-sea development involving trunklines and control system tied back to new and existing facilities. In 2006, Hydro Tasmania Consulting and Australian renewable energy development business, Roaring 40s, established offices in India to capitalise on consulting opportunities in the renewable energy sector (Hydro Tasmania 2006) Leighton is also investing in India with a view to ramping up its involvement in project development (Box 4.5).
BOX 4.5: Leighton’s increasing involvement in india
Leighton is one of Asia’s leading contractors and project developers. It has significantly ramped up its involvement in India over the past couple of years, and sees significant scope for future growth. India’s strong economic growth is driving increased demand for energy. It is also driving a need for improved infrastructure and at the same time is providing a greater capacity to fund infrastructure improvements. Leighton focused its attention initially on oil and gas infrastructure but also sees opportunities in transport infrastructure, coal mining and industrial building projects.
Leighton is part of a consortium that won a contract to modernise the signalling and telecommunications systems on the rail link between Ghaziabad and Kanpur. Leighton will be providing and installing communication systems along the railway line and in the locomotives using the line. Also in joint venture, Leighton won the contract to install new marine terminal facilities near Jamnagar, India for Reliance Ports & Terminals Limited, which is part of Reliance Group, one of India’s largest conglomerates.
Leighton has also looked for business opportunities with major multinationals operating in India. It completed Nokia’s new mobile phone manufacturing plant near Chennai (Leighton 2005a). It has also won contracts to design and construct manufacturing centres for Motorola and , Flextronics and Salcomp.
The Leighton Group is well positioned to meet growing demand for contract mining and associated mine infrastructure in India, which is being fuelled by strong domestic growth and accompanying requirements for power generation and steel production. Leighton subsidiary Thiess currently has staff on the ground in Kolkata and Delhi and has recruited Indian graduates who are being trained in Indonesia and Australia to work in this emerging market.
Coal India is currently responsible for around 90 per cent of India’s annual coal production. Indian coal mining productivity should benefit from the management and technological expertise in mine operation and coal preparation of contract miners. Thiess was the first foreign company to submit a major coal mining tender to work for Coal India’s subsidiary Eastern Coalfields Limited for their Rajmahal Open Cut Expansion Project in the state of Jharkhand. Although this bid was unsuccessful, Thiess is reportedly planning to bid for another contract worth several billion dollars in early 2007 to supply coal to several major power stations in India.
Sources: The Australian 2006, Leighton 2005a, 2005b, 2006a and 2006b, and discussions with Leighton.
www.clough.com.au, accessed April 2006.
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Reflecting the growing demand for mining services, Ludowici opened an office in Chennai in 2006 to undertake design work for mining projects. Mincorp, a Queensland company providing complete solutions for coal washeries, opened an office in Bhubaneswar, Orissa, in 2004. Leighton subsidiary Thiess and the Surpac Minex Group are also pursuing opportunities (Box 4.5 and Box 4.6).
BOX 4.6: surpac minex group
The Surpac Minex Group produces leading-edge software for mine planning, mining, engineering, geology, exploration and mineral resource modelling. The company was formed as a result of a merger between Perth-based Surpac Software International and Australian mining software company ECSI (Minex) in October 2002.
Initially, Surpac serviced India remotely from Australia and the United Kingdom. It then moved to employ local agents. In 2001, after successfully doing business in India for over 10 years, Surpac decided to establish its own office. The company’s presence in India has continued to grow, and today there are a number of divisions in the office including Research and Development, Quality assurance, IT Support, and Sales and Support. Sourced from www.surpac.com.
While Telstra currently does not have a carrier licence in India, it has three offices – in Bangalore, Mumbai and New Delhi – which manage supply of international telecommunications services to the Indian sites of its corporate clients, as well as sales to Indian customers of Telstra services outside India. Telstra has established direct supply arrangements with Indian carriers, such as Videsh Sanchar Nigam Ltd (VSNL) and Bharti, so as to provide a one-stop shop for all telecommunications services for its corporate clients based in India (Telstra 2006). Telstra is also a sales agent for its Hong Kong-headquartered joint venture operation, Reach, which has an Internet service provider licence in India.
All major Australian banks are now represented in India, either directly or through third-party relationships, although none currently has a branch licence. ANZ has had a lengthy involvement in India, initially through its Grindlays businesses, which included the largest foreign bank branch network in the country. ANZ disposed of its Grindlays operation to Standard Chartered in 2000, but retained its investment banking arm. It currently operates as a merchant bank, ANZ Capital Private Limited, in Mumbai. It also has a significant information technology operation in Bangalore, which was established in 1988. The ANZ Trade Centre in Bangalore now employs 1300 IT officers and provides a range of customised services aimed at forging and expanding trade and investment relationships between Australian and New Zealand companies and Indian businesses.10
The sale stemmed from ANZ’s intention, signalled in May 1999, to simplify its international business and focus it on the Asia Pacific (ANZ 2000). The ANZ’s preferred approach today is to enter partnerships with local banks, as it has done in Indonesia, Cambodia, the Philippines and Vietnam. 10 See www.anztradecentre.com.
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The Commonwealth Bank received approval in June 2005 to establish a representative office in Bangalore. The office will lead the Bank’s evaluation of opportunities in India (Commonwealth Bank 2005). National Australia Bank received approval to open a representative office in Mumbai in August 2006. Westpac has a third-party relationship with Standard Chartered Bank (SCB) in India. Under the relationship, SCB supports Westpac customers in India and Westpac supports Indian customers in Australia. At the time of writing Westpac was reviewing its options for establishing a presence in India.
BOX 4.7: macquarie bank
Macquarie Bank established a securities business in Mumbai in July 2005, marking an expansion of Macquarie’s presence into all key Asian markets. It acquired ING’s Asian cash equities business in July 2004 giving it a footprint in 10 Asian countries. It currently employs over 850 staff in Asia and has one of the largest equities sales and research teams dedicated to Asia (Macquarie Bank 2005). The focus of its Indian business is on stockbroking, equity research, investment advisory services and corporate finance. Macquarie sees particular opportunities in India’s infrastructure sector, and also property, telecommunications and media – all sectors in which it has competitive strengths. Macquarie Bank had teamed up with Aeroports de Paris to bid for the restructure and modernisation of the Mumbai and Delhi airports, but its bids were unsuccessful.11 It is reportedly keen to be involved in the privatisation of other airports in India (SMH 2006).
In 2005, AXA Asia Pacific established a joint venture in the insurance sector (Box 4.8), which is expected to invest approximately Rs5 billion (A$150 million) over the first three to four years of operations (Bharti Enterprises 2005a). In the same year, AMP decided to sell its 26 per cent stake in its joint venture business, AMP Sanmar, to Reliance Life Insurance as part of a re-orientation towards its core wealth management businesses in Australia and New Zealand. In Asia, it would henceforth be focused on asset management through AMP Capital Investors. India remains an important market for AMP Capital Investors, with a presence that includes two infrastructure funds and other investments (AMP 2005a, 2005b).
11 Macquarie Bank has an exposure in Airports Company of South Africa, which was part of the winning bid for the Mumbai airport redevelopment. Macquarie Bank’s MacAir has a 28 per cent stake in Aeroporti di Roma, which has a 20 per cent stake in the South African company (SMH 2004).
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BOX 4.8: axa asia pacific
AXA Asia Pacific signed an agreement in August 2005 with Bharti Enterprises, a business conglomerate with interests in telecom, agribusiness and infrastructure projects, to establish a joint venture company to undertake life insurance business in India. AXA Asia Pacific acquired a 26 per cent equity stake in the joint venture, the maximum currently permitted under Indian regulations. AXA Asia Pacific brings to the partnership its global life insurance and asset management expertise, while Bharti brings its strong local market knowledge, reputation and presence. Bharti Televentures has a retail presence in 4500 towns and over 20 million mobile customers, which the joint venture will be seeking to leverage. The joint venture commenced operations on 22 August 2006 with the opening of its first office in Hyderabad. It plans to roll out over 30 branches by the end of 2007.
Sources: Bharti Enterprises 2006, AXA Group 2005, and discussions with AXA Asia Pacific Holdings.
Australian franchises, Gloria Jeans and Cookie Man, have also established operations in India. Other Australian companies are reported to be considering investment opportunities, notably in banking, and in minerals prospecting and exploration.
Indian direct investment in Australia As of October 2006, 26 first and second-tier Indian information technology companies had established a significant presence in Australia to provide IT solutions to local businesses and secure global market opportunities.
Tata Consultancy Services set up a Global Delivery Centre in Melbourne in 2002, which provides software solutions and consulting services to clients in Australia, New Zealand and the Asia Pacific.12 TCS also has a SAP Centre of Excellence in Melbourne (TCS 2005b). TCS launched a credit risk model banking solution for the Indian market in association with JYI Risk Management Services of Melbourne in 2002 (TCS 2002). Having initially partnered with Sydney-based Financial Network Services to deliver a banking platform to the Central Bank of India for the automation of bank branches (Financial Network Services 2005), TCS acquired the business in October 2005 for US$26 million (TCS 2005a). TCS plans to develop its Financial Network Services business into a global centre of excellence for the banking industry (TCS 2006). In November 2006, TCS acquired Australian consultancy firm TCS Management (formerly Total Communications Solutions) for A$1.7 million and performance payments of A$15 million over five years. The acquisition of TCSM, which specialises in strategy conversion, program alignment, portfolio balancing and navigation services, is intended to complement TCS’s global capabilities in consulting, IT services and BPO. It should enable TCS to improve services to its growing Australian client base, which includes BHP, Woolworths, ANZ, St George Bank, Alcoa and Rio Tinto (Business Standard 2006).
12 See www.tcs.com
P A G E 82 The Bilateral Economic Relationship
Satyam’s Melbourne operations house its largest global development centre outside India, and serves as a major technological development and software support centre for the company’s Asia Pacific operations (Satyam 2004). Satyam has entered into an alliance with Victoria University which will enable up to ten VU students to undertake a software development internship with it each year. On successful completion of the training, the students will be allocated to projects in Melbourne or in one of Satyam’s other 46 locations around the world. Satyam will also employ up to 20 of Victoria University’s graduating software engineers each year (Satyam 2005) and provide 20 University of Melbourne software engineering students with internships annually.13 Birlasoft, part of the CK Birla Group, also offers IT services worldwide from development centres in India and Australia.14
Infosys entered the Australian market in 2004 with the acquisition of Melbourne company Expert Information Services for A$31 million (The Australian 2005b). Infosys is structured into globally integrated business units for different parts of its business.15 Gartner Research’s vice-president, Partha Iyengar, has observed that Infosys’ long-term strategic intent is to use Australian resources for its global requirements (The Australian 2004). Accordingly, Infosys is forging partnerships with Australian technology developers (Invest Australia 2005a). For example, it concluded an agreement with the Smart Internet Technology Cooperative Research Centre for joint efforts in research and development. The partnership will result in opportunities for Smart Internet’s growth through the leveraging of Infosys’ global network and knowledge base. The collaboration involves the investment of $A800 000 in Australian research and development over four years (Infosys 2004).
The partnerships are in turn stimulating export opportunities for Australia. The CSIRO recently signed a cooperation agreement with Infosys, which encompasses research and development cooperation for information engineering, as well as the commercialisation of CSIRO’s technology. This will enable the CSIRO to market its Australian-developed intellectual property through Infosys’ strong global distribution network (Coonan 2005a). The Australian Information Industry Association (AIIA) and its counterpart, the National Association of Software and Service Companies (NASSCOM), have also forged a cooperative working relationship in order to further enhance business-to-business links between Australian and Indian information and communications technology companies, and thereby generate additional bilateral trade and investment opportunities.
Indian companies are increasingly investing in Australia outside the information and communications technology sector. The Taj Hotels Resorts and Palaces, part of the Tata Group, acquired a 100‑room hotel, situated at The Wharf at Woolloomooloo in Sydney, in December 2005 for A$36 million (Taj Hotels 2005). The State Bank of India has a branch office in Sydney. Additional Indian investment in the banking and finance sectors can be expected as trade and investment linkages develop further.
13 Based on correspondence in December 2006 with Professor Frank P Larkins, Deputy Vice Chancellor (International), the University of Melbourne. Satyam signed an MOU with the University of Melbourne in September 2006. 14 See www.birlasoft.com 15 Discussions with K. Dinesh, co-founder and Member of the Board of Infosys.
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A platform for future growth
A key factor in the heightened interest of Australian business in the Indian market, which is being reflected in increased trade and investment linkages between the two countries, has been the push from the Australian and state governments, supported by the Australia India Business Council. The Australian Government has recently directed increasing attention to the Indian market. A Trade and Economic Framework Agreement was signed between Australia and India during Prime Minister Howard’s visit to India in March 2006. The Agreement will provide an important basis for the facilitation and future development of the trade and economic relationship, and will encourage closer strategic cooperation in many of the key economic sectors. Specific services sectors identified for cooperation include infrastructure development and financing; information and communications technology; education; tourism; film and entertainment; sporting event infrastructure, management, technology and medicine; and biotechnology.
The Australian Government is also encouraging the development of productive, cooperative links between Australian and Indian businesses, industry bodies and research institutions in specific services sectors. For example, Prime Minister Howard announced a new A$25 million bilateral research and fellowships program during his visit to India in March 2006. The stated aim of this initiative is to generate stronger links between Australian and Indian scientists and their research institutions; strengthen the overall bilateral relationships to the benefit of both nations; and highlight within India the high quality of Australian education, science and training services.
Links have also been fostered through memoranda of understanding, reciprocal trade missions, the promotion and facilitation of joint ventures and partnerships, trade and investment and, more broadly, through promoting the respective strengths of the two economies. For example, during his March 2006 visit, Prime Minister Howard witnessed the signing of Memoranda of Understanding on Defence Cooperation, Customs and Biotechnology, a bilateral Air Services Agreement, and the Scientific Collaboration Fund. Australia’s television service in the Asia Pacific region, Australia Network, has been broadcasting local Australian content into India since September 2005, generating increased awareness of Australia in the Indian market. Australia Network is available in approximately five million homes in India, and the number is growing rapidly.
Overarching coordination of the Australian Government presence in India is carried out by the High Commission in New Delhi, supported by the Consulate-General in Mumbai. Prime Minister Howard announced the establishment of a Consulate-General in Chennai during his March 2006 visit. Australian Government representatives from Austrade and Invest Australia are on the ground in India to assist Australian exporters capitalise on business opportunities and facilitate Indian investment in Australia. Austrade has offices in New Delhi (within the Australian High Commission), Mumbai (within the Australian Consulate-General), Bangalore, Kolkata, Chennai and Hyderabad. Invest Australia has offices in New Delhi (within the Australian High Commission), and Mumbai (within the Australian Consulate-General).
P A G E 84 The Bilateral Economic Relationship
A number of state governments have also identified India as a strategic market. For example, Victoria has launched an ‘Opening Doors to Export’ plan which focuses on the promotion of exports in three emerging markets identified as key growth markets for Victorian exporters – North Asia, India and the Middle East – and has appointed a Special Trade Envoy to India (Business Victoria 2004). There have been several state-government-led business missions to India over the past two or three years, most with a strong focus on services sectors. A number of Memoranda of understanding have been signed during these visits. Western Australia has a Trade Office in Mumbai; Queensland has a Trade and Investment Office in Bangalore; Victoria recently opened a Business Office in Bangalore; while South Australia appointed a commercial representative in Chennai.
Business associations and chambers of commerce in both Australia and India play an important role in facilitating bilateral trade and investment. The Australia India Business Council (AIBC) is a national bilateral chamber of commerce committed to building stronger business links between Australia and India for the benefit of both countries. It maintains close links to the federal and state governments and showcases business opportunities in India to the Australian business community through an active program of events nationally.
P A G E 85 P A G E 86 C h a p t e r 5
INDIA’S BUSINESS ENVIRONMENT: IMPLICATIONS FOR AUSTRALIAn COMPANIES
KEY POINTS
• India’s improved economic performance has been accompanied by a dramatic increase in its external trade and by its implementing of policies to attract foreign investment, although there is scope for further liberalisation in these areas.
– India’s rapidly increasing middle class and growing consumer affluence is already a draw-card for foreign investors and exporters, and a likely source of future opportunities for service providers.
– The need for economic reform is now more broadly accepted in India and while further reforms may be gradual, once implemented they are likely to be durable given the need to build consensus among decision-makers in a democratic environment.
• Australian companies can benefit from favourable perceptions of their country in India and significant people-to-people links in seeking to capitalise on business opportunities.
• Nonetheless, hurdles in improving the business environment remain, and it will be important for Australian companies wishing to exploit business opportunities in India to be aware of these.
– Power and transport infrastructure shortcomings are a major concern, although these tend to act as less of a brake on services than on manufacturing.
– Many regulations remain onerous, despite significant attention over recent years to addressing regulatory barriers and burdens.
– Corruption remains a concern for business operating in India, although such behaviour is being curtailed by increased competition, deregulation and e‑governance, improved accountability mechanisms and an increasingly activist media and NGO community.
• While India presents as a potentially attractive market for many Australian businesses, they need to invest time and effort in understanding the business environment and its challenges.
– Prerequisites for building a successful business in the Indian market include detailed research and targeted preparation, careful selection of a business partner or customer, the ability to take a long-term view and the capacity to ride out rough patches.
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‘India’s economy will continue to have the capacity to surprise optimists negatively, and to surprise pessimists positively.’ (Financial analyst)
India is successfully managing its transition to a more open economy, spurred by the reforms initiated by the then Finance Minister Manmohan Singh in 1991. The reforms have resulted in reduced public sector participation in the economy, greater openness to international competition and significant deregulation. India’s increasingly dynamic and competitive private sector now accounts for nearly 80 per cent of GDP (RBI 2005b). Both exports and imports, particularly of services, are growing strongly. The workforce is becoming increasingly skilled and the economy is being driven more and more by knowledge-based industries, notably IT–ITES. Incomes per capita are increasing, consumer tastes are changing and the aspirations of the younger population are rising. Foreign exporters and investors recognise India’s emergence and want to do business with India. If growth in India’s knowledge-intensive services flows through into broader sustainable economic development, their eyes will be focused on India for a long time to come. Recent figures showing a rapid increase in manufacturing output suggests that such developments may indeed be starting to occur.
Optimism is a fine thing – and of itself is contributing to the sense of energy and success which is currently driving India forward. But some caveats are also required. The rosy growth scenario sketched out in preceding chapters is by no means the only one. A study by the World Economic Forum and Confederation of Indian Industry (WEF 2005) presents three scenarios for India to 2025. The most pessimistic of these scenarios, which is premised on the government failing to instigate appropriate reforms and a difficult global environment, would see India slipping back towards the lower growth rates of earlier decades.
India’s government remains of a reformist mindset. But the task it faces is enormous. While reforms to date have been impressive, there remain some major hurdles in India’s business environment that will need to be overcome for sustainable growth to take place in the broader Indian economy. Australian companies wishing to exploit the opportunities India presents will do well to be aware of these. Chief among them are continuing power and transport infrastructure constraints, significant amounts of regulation in many sectors, and the need to adapt to challenging business practices.
Australian companies enjoy some advantages over others in capitalising on business opportunities in India. But a recurring theme in the authors’ conversations with companies already operating successfully in India was the need for Australian entrants to the market to calibrate their expectations carefully. Australian businesses need to invest time and effort in understanding the business environment in India and its challenges; to be willing to do the hard yards required to adapt; to accept that establishing a business presence will be time-consuming and possibly frustrating; and to take a long-term strategic view of their prospects, if they are to be successful.
2004–05 figures at factor cost.
P A G E 88 India’s Business Environment: Implications for Australian Companies
AN IMPROVING BUSINESS ENVIRONMENT
Reform efforts and prospects ‘Because of its need to build a consensus for reform, in the longer term India’s rise may prove even more durable than that of China.’ (AFR 2005)
The far-reaching economic reforms outlined in particular by the Indian Government’s July 1991 Statement on Industrial Policy aimed to foster a more vibrant economy, with far higher growth rates than those realised over the first three decades of India’s post-independence period. In addition to deregulation at the sectoral level (see Chapter 2), the reforms have included significant liberalisation of industrial policy, public sector enterprises, foreign exchange controls, interest rates, competition policy and taxation (Box 5.1), as well as tariffs and foreign investment (see section on ‘Increased openness to trade and foreign investment’ below). However commentators such as the World Bank continue to point to the need for further reforms if recent growth rates are to be sustained and the growth driven by knowledge-intensive services is to be replicated in other, more regulated areas of the economy.
The need for ongoing reforms is now more broadly accepted in India. A strongly performing economy, increasing consumer affluence, a buoyant external sector and record foreign exchange holdings have given rise to confidence that policy makers will continue down the path of reform. The success enjoyed by reforming sectors has led to pressure for reforms to reap improved efficiencies in other industries they depend upon.
Owing to the success of deregulation and liberalisation policies of the past decade-and-a-half, both central and state governments have come to recognise the need for a thriving private sector. For its part, the Planning Commission’s policies are now focused on facilitating private sector development. Following the devolution of many economic powers from the centre, state governments are now competing to attract foreign and domestic investment, which is in turn helping to drive improvements in policy, infrastructure and the overall business environment. Accordingly, by 2004–05, the public sector’s share of GDP was just 23.6 per cent. Further reinforcing the point, IT–ITES’s success is widely attributed to the government’s light-handed approach to regulation in that sector (see Chapter 2). The rapid growth of IT–ITES and other knowledge-based sectors shows clearly that Indian companies can thrive in the face of international competition.
Indian CSO 2006, Statement 18. Includes public services in quasi-government bodies. By comparison, the public sector share in Australia’s GDP was 22.0 per cent in the December quarter 2005.
P A G E 89 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
BOX 5.1: India’s MAJOR economic reforms SINCE 1991
• Industrial policy was significantly liberalised in 1991 and reform has continued in the subsequent period. Compulsory industrial licensing for new undertakings or expansions was abolished in 1991 for all but 18 industries. The number of industries exclusively reserved for the public sector was reduced to eight. Today, six industries remain subject to compulsory licensing (mainly on account of environmental, safety and strategic grounds), while the only industries exclusively reserved for the public sector are atomic energy and railway transport. The number of manufacturing industries reserved for the small-scale sector has been reduced over time, but remains in excess of 50.
• Some public sector enterprises have been partially privatised, although outcomes to date have been modest and privatisation remains controversial. Numerous public enterprises have been corporatised while others have been given greater managerial autonomy and operational flexibility.
• Foreign exchange controls have been gradually relaxed since the early 1990s. A market-determined exchange rate system and full convertibility on the current account were in place by the early 1990s. Regulatory emphasis in relation to foreign exchange shifted significantly from control over use to management with the passing of the Foreign Exchange Management Act (FEMA) in 1999. The rupee is today almost fully convertible on the capital account for non-residents.
• An administered interest rates regime was progressively replaced by a system of market- determined interest rates during the 1990s.
• The Competition Act 2002 replaced the Monopolies and Restrictive trade Practices Act 1969, which heavily circumscribed the operations of monopolies. The new Act aims to curb anti-competitive behaviour and abuse of dominant market positions; and regulates mergers and acquisitions. The Competition Commission of India, a new regulatory body with a scrutiny and enforcement role, has been established. Independent regulators have also been created in a number of sectors.
• Taxation reform has focused on broadening the indirect tax base and removing distortions. A central services tax was introduced in 1994, and has been increased on two occasions to stand now at ten per cent. Additional services have been progressively brought into the tax net. Central excise duties on manufactured goods have been replaced by CENVAT, a 16 per cent tax on value added up to the manufacturing stage. A uniform state level VAT on goods, applying up to the retail stage, was introduced in April 2005, replacing state sales taxes. The standard tax rate is 12.5 per cent, although some goods attract a four or a one per cent tax. The tax replaced state-level sales taxes, entry taxes, purchase taxes and turnover taxes. The four per cent central sales tax levied on interstate sales of goods is also set to be phased out. In the 2006–07 Budget, the Finance Minister laid down a target date of April 2010 for the adoption of a national level goods and services tax, shared between the centre and the states. This will require a merging of CENVAT and state level VAT in some fashion.
P A G E 90 India’s Business Environment: Implications for Australian Companies
Only the pace of reforms is open to question. Economic reforms since the current United Progressive Alliance (UPA) government came to power in May 2004 have been more measured than under the previous National Democratic Alliance (NDA) government led by the Bharatiya Janata Party. During the election campaign, the Congress Party, the main party within the governing coalition, said it would pursue economic reforms with a ‘human face’. The ‘National Common Minimum Programme’, a pact agreed between the UPA government and the Communist and other parties it relies upon to maintain a majority in India’s lower house of parliament, reflects this stance (National Advisory Council 2004).
In general, reforms are more likely to be held up by political opposition when they are dependent on legislative change rather than administrative decisions and notifications. Notwithstanding the progress being made by the Government in achieving reforms on the administrative front, some progress on flagship reforms such as labour laws and privatisation will be important to convince investors that the process is retaining momentum.
Reforms in democratic India tend to be take place gradually because of the need to build consensus for reform among governing coalitions. In the longer term however, India’s democratic processes should underpin the durability of the reforms, provided reformers can point to improved performance and benefits for the majority of the Indian population.
Increased openness to trade and foreign investment India’s improved economic performance has been accompanied by a dramatic increase in its outward orientation. Trade as a proportion of GDP has increased from 16 per cent in 1990–91 to 40 per cent in 2004–05. Average applied tariffs have declined significantly from prohibitive rates since the early 1990s (Box 5.2), although they still remain higher than in many developing countries.
BOX 5.2: indian tariffs
Prior to the 1990s reforms, most Indian imports were subject to licensing restrictions and high tariffs. India’s average tariff on non-agricultural products was reduced from 73 per cent in 1992–93 to 36 per cent in 1997–98 to 31 per cent in 2001–02. Maximum tariffs have been subject to cuts in more recent years. The tariff on most non-agricultural goods was lowered in January 2004 from 25 to 20 per cent; and the four per cent ‘Special Additional Duty’, which had been levied on virtually all imports since the 1998–99 budget, was abolished (although it was reinstated in 2006). The peak rate of customs duty on non-agricultural imports was further reduced in the 2006–07 Budget from 15 to 12.5 per cent. Lower input costs resulting from the tariff cuts have significantly enhanced the competitiveness of Indian industry.
Sourced from successive WTO Trade Policy Reviews of India.
P A G E 91 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
In addition to tariff reductions, which effectively act as an incentive to export by making production for domestic consumption relatively less attractive, the Indian Government has instituted a number of trade measures to encourage exports, with particular focus on the services sector (Box 5.3).
BOX 5.3: Policy measures to support exports
• Numerous Special Economic Zones (SEZs) for both manufacturing and service provision have been established since April 2000, while eight Export Processing Zones have been converted into SEZs. The SEZs offer superior infrastructure facilities and tax concessions with a view to stimulating foreign investment and exports.
• Under the ‘Star Export Houses’ scheme, both merchandise and services exports can apply for status as Star Export Houses and consequently be eligible for a number of privileges including fast-track clearance procedures for both exports and imports. Exporters are categorised according to the value of their exports. Star Export Houses achieving rapid growth in their exports are entitled to duty credits under the newly introduced Target Plus scheme.
• The ‘Served from India’ scheme, a revamped version of the earlier duty free export credit scheme for services, involves duty credit entitlements for service providers depending on their level of foreign exchange earnings.
• The Export Promotion Capital Goods scheme, accessible by all exporters including exporters of services, has been made more flexible. Under the scheme, the import of capital goods at a five per cent rate of duty is allowed, subject to fulfilling an obligation to export the equivalent of eight times the duty saved over a period of eight years.
• ‘Export Oriented Units’ (EOUs) – units established anywhere which export all their production – have been extended benefits additional to duty free imports, including exemption from service tax. EOUs selling some of their output within the ‘domestic tariff area’ also enjoy some concessions, subject to certain conditions. Units in free trade zones, export processing zones, electronics hardware/software technology parks, and bio-tech parks enjoy similar privileges.
• Duty exemption schemes are available, enabling the duty free import of inputs required for export production.
Source: Directorate General of Foreign Trade 2004
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Foreign direct investment (FDI) has an important role to play in India’s development. Both the central and state governments have assumed a more welcoming stance towards FDI, and this, as well as increasingly positive sentiment on the part of foreign investors, has resulted in healthier foreign investment inflows (Figure 5.1). The US$7.2 billion inflow in 2005–06 is in the vicinity of the US$8 billion a year inflow judged necessary to underpin the eight per cent GDP growth rate envisaged for the Tenth Five Year Plan period (Indian Planning Commission 2002d).
F i g u r e 5 . 1 FDI picking up India’s direct investment inflows, 1991–92 to 2005–06 (US$ billion)
8
7 Total, including re-invested earnings and other capital Equity 6
5
4
US$ billion 3
2
1
0 1992–93 1997–98 1991–92 1994–95 1996–97 1998–99 1999–00 2001–02 2004–05 2005–06 1993–94 1995–96 2000–01 2002–03 2003–04
Note: FDI data have recently been brought into line with international statistical standards by incorporating reinvested earnings and inter- company debt transactions components. For the years prior to 2000–01, data are only available for the equity component. Source: DIPP 2006.
In recent years, India has relaxed restrictions on FDI, with higher equity caps and investment approvals granted automatically (the ‘automatic route’) for most services sectors, although limits on foreign equity holdings continue to act as a restraint on investors’ operations (see Figure 5.2 and Table 5.1). India has also streamlined its procedures, set target timeframes and introduced greater transparency for the consideration of FDI proposals by the Foreign Investment Promotion Board (FIPB), the body charged with considering FDI in activities not covered by the automatic route (DIPP 2005a). A Foreign Investment Implementation Authority was established in 1999 to facilitate quick implementation of FDI approvals required by investors to get a project up and running. The Authority is assisted by ‘Fast-track Committees’ which include state government agencies concerned with the implementation of projects.
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Notwithstanding these central Government policy initiatives, the investment climate in India tends to vary from state to state. Significant differences can exist on such measures as cost and complexity of regulations and approvals processes; the attitude of state government officials in facilitating business; state government incentives; and the availability of trained manpower.
F i g u r e 5 . 2 Evolution of FDI policy in India The progressive liberalisation of FDI policy, 1991–2005
2001–05 More sectors opened. Equity caps raised in many other sectors. Procedures simplified.
2000 Up to 100 per cent under Automatic Route in most sectors, except a small negative list.
1997 Up to 74/51/50 per cent in 112 sectors under the Automatic Route; 100 per cent in some sectors.
1991 FDI up to 51 per cent allowed under the Automatic route in 35 Priority sectors.
Pre 1991 Allowed selectively up to 40 per cent.
FDI policy liberalisation
Source: DIPP 2005b
Foreign investors and local players – most notably in areas such as information technology, pharmaceuticals, and film – also benefit from India’s legislative provisions for the protection of intellectual property (Box 5.4), although some improvements are still possible on the enforcement front. Increasingly, Indian companies – particularly in areas such as software development and biotechnology – are themselves driving reform in this area pushing for greater protection of intellectual property rights to protect their own innovations.
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BOX 5.4: Intellectual property rights
India has implemented a number of major improvements in its intellectual property rights regime in order to meet its obligations under the 1994 WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. As a developing country, it had a transition period of five years to implement the Agreement, beginning in January 1995. It also had a further five years to extend its product patent protection to areas of technology not already protected. It undertook to meet its patent obligations by a January 2005 deadline, in three phases (Deloitte 2005). The outcome has been three amendments to the Patents Act, 1970. The Patents (Amendment) Act, 1999 introduced a transitional facility in the fields of pharmaceuticals and agriculture chemicals and a system of exclusive marketing rights (previously only process patents were granted). It included a number of substantive and procedural changes bringing Indian patent law more into line with international norms. Changes introduced under the Patents (Amendment) Act 2002 included increasing the term of patents to 20 years from date of filing and extended patent protection to drugs, foods and chemicals. India acceded to the Paris Convention on Intellectual Property in 1998.
The Copyright (Amendment) Act 1994 provided protection to all original literary, dramatic, musical and artistic works, cinematography, films and sound recordings, and also brought satellite broadcasting, computer software and digital technology under copyright protection. The Copyright (Amendment) Act 1999 effected changes to make the law fully compatible with the provisions of the TRIPS Agreement. India is a party to the Berne Convention for the Protection of Literary and Artistic Works. The Trademarks Act 1999 served to provide better protection of trademarks for goods and services.
While the investment environment still has shortcomings, A.T. Kearney’s 2005 FDI Confidence Index, which is based on a survey of executives from the world’s largest companies, ranked India the second- most attractive FDI destination in the world, up from third place in 2004. India’s attractiveness to foreign investors is expected to increase, provided further reforms are initiated and infrastructure, logistics and regulatory barriers addressed (A.T. Kearney 2005). Table 5.1 details the services sectors which are open to investment by foreign players.
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T a b l e 5 . 1 Most sectors now open to FDI Current foreign direct investment guidelines for services sectors
Foreign Approval Sector Comments equity limits mechanism
Infrastructure Includes hotels, resorts, hospitals, educational institutions, and greenfield Townships, building, 100% Automatic airport projects. FDI not permitted in housing infrastructure and and real estate. construction projects FIPB approval required for more than 74% equity in airport development. Tax holidays for development or operation and maintenance of most infrastructure projects. ‘Viability Gap Funding’ available for Public Private Partnership (PPP) infrastructure projects.
Trading Retail trading activity Not permitted* *51% FDI permitted in single brand product retailing and in bulk imports with bonded
warehouses subject to FIPB approval.
Cash and carry 100% Automatic 100% FDI permitted in export sector trading wholesale trading and wholesale cash and carry under the automatic route.
Transport Domestic airlines 49% Automatic Direct or indirect participation of foreign airlines not permitted.
Road and maritime 100% Automatic transport services Railways Not permitted
Telecommunications Includes basic, cellular, unified access services, national/international long distance, Telecom services 74%* Automatic V-Sat, public mobile radio trunked services, approval up global mobile personal communications to 49% services and other VAS. 74% limit relates to foreign investment from all sources, including institutional investors. Certain conditions apply to ensure management of service providers remains in Indian hands. *The Indian Government has frozen the 74% level until the FDI rules are consistent with the licence guidelines. A resolution is expected in early 2007.
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Foreign Approval Sector Comments equity limits mechanism
Finance and 74% limit relates to foreign investment from insurance all sources, including institutional investors.
Private banks 74%* Automatic *This ‘liberalisation’ occurred just prior approval up to the 2004 elections and implementing to 5% guidelines are yet to be issued by the RBI. The incoming UPA government postponed the opening of the sector to 2009. A 10% shareholding limit in private sector banks applies in the meantime, except those identified for restructuring.
Insurance 26% Automatic 26% limit relates to foreign investment from all sources, including institutional investors. While approval is automatic, a license is required to operate.
Non-bank financial 100% Automatic Includes merchant banking, underwriting, companies portfolio management services, investment advisory services, financial consultancy, stock broking, asset management, venture capital, leasing and finance.
Selected other sectors Computer-related 100% Automatic services, advertising and films, R&D services, construction and related engineering services, Pollution control and management services, architectural services, health-related and social services, travel‑related services
Note: More liberal arrangements apply for non-resident Indian investments. Source: DIPP 2005a, and DIPP Press Notes.
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Recognising that a local presence is often necessary to facilitate the export of services abroad (Indian Department of Commerce 2002), the Indian Government has relaxed restrictions on outward investment. Increased FDI outflows have followed. FDI abroad in non-financial services sectors over the years 2002–03 to 2005–06 amounted to more than US$1.7 billion, led by India’s information technology companies which are increasingly adopting a global approach to service delivery (RBI 2005d, 2006b).
India’s rapidly growing knowledge-intensive services exports have encouraged the Government to play a more active role in multilateral, regional and bilateral trade negotiations on services and services-related outward investment. Given both the significance of services exports to its economy and its increasing prominence as an overseas investor, a liberalising outcome to the WTO services negotiations would clearly be of benefit to India (Box 5.5).
BOX 5.5 india’s INCREASINGLY ACTIVE ROLE IN TRADE NEGOTIATIONS COVERING SERVICES
In the Uruguay Round formally concluded in 1994, India committed to allowing foreign equity participation in a limited number of sectors, but otherwise made very limited commitments on services, both in terms of quality and sectoral coverage. India is a key player in the current WTO Doha Round as a leading Member of the ‘G20’ (developing country agricultural exporters). While it has adopted a generally conservative position on agricultural market access, it has become much more ambitious in the services negotiations. India’s initial offer on services related only to sectors in which it had already made commitments under the Uruguay Round. However its revised August 2005 offer covered just over half of the 160 sectors and sub- sectors in the WTO services classification list, including higher education and environmental services in which it had not previously made commitments. While Australia has acknowledged the improvements in sectoral coverage and depth of commitments in India’s revised offer, a number of Australia’s requests remain unmet, including those related to FDI restrictions; limitations in insurance and banking; better access for foreign lawyers; and a more open regime on telecoms, energy and professional services. India has made no commitments on mining and energy-related services, areas of key interest to Australia.
India has submitted requests to its trading partners in a number of services sectors, aiming at more liberal commitments in respect of cross-border supply (Mode 1) and of temporary entry by business people (Mode 4). Access conditions for the cross-border supply of services are critical for exports of IT–ITES and other business services. Similarly, in order to facilitate the temporary movement of Indian professionals in computer-related, hospital and audio visual services sectors, India is pushing for WTO commitments to facilitate the movement of contractual services suppliers and independent professionals, including clear prescription
The WTO General Agreement on Trade in Services distinguishes between four modes of supply: By virtue of Mode 2: Consumption abroad, services delivered in India to foreign visitors are counted as exports. Similarly services delivered abroad through the commercial presence of an Indian enterprise are considered exports under Mode 3: Commercial presence.
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BOX 5.5 (Continued)
of duration of stay and the removal of labour market and economic needs tests. It is also a strong proponent of developing broad disciplines on the domestic regulation of services covering qualification requirements and procedures, licensing and technical standards. India is particularly interested in recognition of professional qualifications in sectors such as computer-related services, hospital services, and architectural services (Indian Department of Commerce 2002, Indian Ministry of Finance 2006).
Given the potential of India’s conventional and medical tourism industries, as well as its existing and prospective overseas investment interests in sectors such as ICT, it appears to be in its interests to push more actively for better Mode 2 (consumption abroad) and Mode 3 (commercial presence) access from its trading partners. The Report of the Steering Group on FDI has advocated automatic approval for up to 100 per cent foreign equity for most sectors of the economy, although only limited further relaxation has occurred to date under the current National Congress-led UPA government (Indian Planning Commission 2002d).
India made its first substantive commitments on services and investment in a Comprehensive Economic Cooperation Agreement with Singapore, which was signed in June 2005. Under this agreement, India agreed to allow three major Singapore banks to establish wholly-owned subsidiaries in its territory, with Singapore making a similar commitment in respect of three Indian banks. Both countries agreed to ease visa restrictions governing the temporary entry of business visitors, service suppliers, intra-corporate transferees as well as professionals from a wide range of occupations. Mutual recognition arrangements for education, experience and licensing requirements are to be negotiated, initially in the areas of accounting and auditing, architecture, doctors, dental and nursing. Both countries have undertaken to encourage close cooperation between their educational institutions and agreed to mutual recognition of degrees for university admission purposes.
India is pursuing trade agreements covering services and investment with ASEAN, the Gulf Cooperation Council, Japan, the Republic of Korea, the EU, Thailand, the South Asian Association for Regional Cooperation member states (through the Framework Agreement on the South Asia Free Trade Area) and its Bay of Bengal partners (through the Bay of Bengal Initiative for Multi-Sector Technical and Economic Cooperation). Despite the benefits which would accrue to India from liberalisation of services trade, it has typically finalised negotiations on goods prior to services and investment.
Indian investments in Australia are detailed in Chapter 4.
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Rising consumerism and a growing middle class
India’s rapidly increasing middle class and growing consumer affluence are already a draw-card for foreign investors and exporters. Australian service providers should be aware of these demographic changes and the opportunities that likely to emerge from them.
The Indian consumer population is characterised by dynamic change and increasing confidence. With greater media exposure and a population increasingly travelling abroad, Western trends, tastes and brands are in growing demand, particularly among the younger age group which tends to have higher aspirations. Around 47 per cent of India’s one billion plus population is under 20 years of age, including almost 160 million in their teens. By 2015, the under-20 age group will grow to 55 per cent of the population (Business Standard 2005). Double-income families are becoming increasingly common as more and more women enter the workforce, providing a spur to consumer spending. Indian consumers are now more readily able to access finance in order to purchase goods and services. By December 2004, the number of credit cards issued by banks and outstanding had grown to 43 million, up from 27 million just one year earlier (Gopinath 2005). Other forms of consumer credit are also growing rapidly.
ADVANTAGES FOR AUSTRALIAN COMPANIES
Australian companies enjoy a degree of benefit from favourable perceptions of their country in India, despite having to compete fiercely for attention with larger players such as the United States, Europe and China. Indians perceive Australia as a friendly, safe and reasonably-priced destination for their children’s education.
English is widely spoken in business. A 1997 ‘India Today’ survey suggested that about one-third of the Indian population has the ability to carry on a conversation in English. That is, there are more English speakers in India than in the United States and Britain combined. Both countries have a particular affinity for cricket, and the importance of its capacity to engender fellow-feeling should not be underestimated. The Indian law of contract is based on the common law principles of contract, although similarities in the legal systems of the two countries should not be overstated.
There are also significant people-to-people links, through migration and education, which represent a potential asset when it comes to exploiting trade and investment opportunities (Box 5.6). The entrepreneurial spirit common to both countries is also a plus.
Recent efforts to broaden the base of business relationships by federal and state government-led business missions to India have helped raise Australia’s profile and improve Indian awareness of Australian capabilities and expertise in a number of areas.
See www.abc.net.au/newsradio/txt/s1363471.htm.
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BOX 5.6: CAPITALISING ON PERSONAL LINKS – INDIANS IN AUSTRALIA
In 2001, there were around 95 000 people living in Australia who were born in India (DIMIA 2003). Altogether, there were over 156 000 people of Indian ancestry (ABS 2004). India is Australia’s second-largest source of skilled migration, accounting for 13 per cent of visas granted in 2004–05 (DIMIA 2006).
Indian-born immigrants have among the highest levels of educational training and qualifications of any group in Australia. An exceptionally high number of Indian-born immigrants hold post- secondary qualifications and many are employed in professional, technical and other white- collar occupations. In recent years, a significant number of Indian students who undertook higher education in Australia in fields of study with high labour market demand have opted for permanent migration.
This skilled diaspora represents a potential asset for both countries when it comes to exploiting trade and investment opportunities in the fast growing and increasingly open Indian economy. Non-resident Indians have additional freedoms in some areas of FDI in India compared with other foreigners. The passing of India’s Citizenship (Amendment) Bill 2003, which permits citizens of Indian origin from Australia and 15 other countries to hold dual citizenship, may also open further investment opportunities for non-resident Indians as citizens. A number of Australian companies have been engaging non-resident Indians to manage or advise on their Indian interests (JSCFADT 1998).
REMAINING HURDLES
‘Significant constraints to the country’s growth potential, including fiscal fragility, infrastructure bottlenecks, the continued burden of excessive regulation and bureaucracy, shortcomings in the financial and agricultural sectors, and the pressures associated with growing inter- and intra-regional inequality, will all need to be overcome.’ (Thirlwell 2004)
India’s investment climate has improved enormously over recent years. Nevertheless, a range of impediments to investment remain.
A survey of the Australian business community in India undertaken by the Australian High Commission in New Delhi in early 2005 revealed a number of concerns. Some companies had experiences of customers not adhering to contracts. Companies also noted differences between states in their receptiveness to foreign investment, as well as business incentives and taxation treatment. Where FDI equity limits apply, it can be difficult for companies to convince their shareholders of the value of a minority investment. Moreover growth prospects can be constrained by the size and resources of
Investors in India can avail themselves of a wide range of investment advisory services. A number of the large consultancy and accountancy houses also publish information on the investment climate, for example PricewaterhouseCoopers’ Destination India: A Brief Overview of Tax and Regulatory Framework, available at www.pwc.com.
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the Indian joint venture partner. The regulatory framework in a number of industries, notably mining, was cumbersome and lacked transparency. Business licences, particularly in emerging industries, could be difficult to obtain.
A recent report by the Indian Investment Commission points out that sustaining growth rates of over eight per cent a year would require a significant increase in investment levels in the economy, and highlights a number impediments to investment. These include: entry barriers in several sectors, an uneven playing field in sectors dominated by public sector undertakings, inflexible labour laws, bureaucratic delays and discretion, and divergence on investment policy between the central and state governments (Indian Investment Commission 2006b). The report identified a series of recommendations aimed at establishing a more open, stable and consistent investment regime, and advocates the promotion of Special Economic Zones (SEZs) for key sectors.
Perhaps the greatest immediate impediment to business lies in power and transport infrastructure shortcomings. Power shortages and transport infrastructure bottlenecks have a bearing on most economic activity, although more so in manufacturing than services. But even in the information technology sector, the state of infrastructure in India is seen as a major issue by multinationals locating functions there (McKinsey 2005a). In addition, while significant attention has been devoted to addressing regulatory barriers and burdens over recent years, many regulations remain onerous.
Infrastructure The poor state of India’s infrastructure has acted as a major, if not the major, constraint to growth and is cause for some consternation amongst foreign investors. A key finding arising from interviews of companies conducted on behalf of KPMG International in May 2005 was that India might fail to attract more foreign investment if it does not make more rapid improvements to its infrastructure (KPMG 2005).
Despite a significant allocation of resources to major infrastructure projects, it will be a challenge to meet existing and future demand. To some extent, the problems faced are a reflection of India’s economic success in recent years. Infrastructure development is happening but is not keeping pace with ever-shifting and ever-increasing requirements.
The government’s finances are already stretched. The states, too, find it difficult to mobilise sizeable resources for development expenditure. Efforts to reduce the fiscal deficits at both the centre and the states are, however, starting to meet with some success, which should provide scope to direct more public spending into infrastructure works.
The National Common Minimum Programme attaches the highest priority to the development of physical infrastructure. It contains an undertaking to enhance public investment in infrastructure and at the same time bolster private sector involvement through the Public Private Partnerships scheme. However, the Rs15 billion (US$340 million) provision in 2005–06 for Viability Gap Funding under the scheme is very modest given the infrastructure investment expenditures required.
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Contributing to the difficulties faced, many public infrastructure projects have not been completed in a timely manner, reflecting poor scheduling and prioritisation, and inadequate management and oversight (Indian Planning Commission 2002a). The number of delayed public sector projects increased in 2003–04 and cost overruns were substantial (RBI 2005d, Table 2.10).
Power sector The power sector is beset with problems. Up to 40 per cent of electricity generated is believed to be lost in transmission (Fortune 2005). The average Indian business faces 17 power outages a month, and over 60 per cent run their own generators (Accenture, 2006). Electricity theft, below-cost pricing and the provision of free power to some rural areas has resulted in under-investment in the sector, and consequently unreliable supply and high prices for paying customers.
Generation capacity has grown rapidly, but has failed to keep pace with demand, resulting in continuing energy shortages and outages during peak periods. In the Ninth Five Year Plan period (1997–2002), barely half of the additional capacity planned was actually developed (Indian Planning Commission 2002a). The poor and deteriorating financial position of state electricity boards, stemming from tariffs insufficient to cover costs because of cross-subsidisation, has acted to discourage private sector investment in power generation. In the current Plan period (2002–07), the government’s expectations of generation capacity addition by the private sector are much reduced, but look to significant extra capacity coming from the public sector. The government’s Viability Gap Funding and the passing of the Electricity Act, 2003, could lead to increased capacity down the track. But continuing power shortages can be expected for some time to come.
The 2005 National Electricity Policy establishes guidelines for accelerated development of the power sector and sets the objective of fully meeting the demand for power by 2012. An estimated Rs9000 billion (over US$200 billion at 2002–03 prices) needs to be invested to achieve this objective. Recognising the immense funding required, the policy emphasises the need for Public Private Partnerships.
The Government recently adopted a model for fast tracking mega-power projects. Projects are parked in ‘shell’ companies with all necessary clearances in place. These ‘shell’ companies are then auctioned through competitive bidding to Indian and foreign investors, with the main criterion being the price at which power will be supplied.
Transport infrastructure Capacity shortages on the main road and rail links are a major constraint to growth. Problems are compounded by inadequate maintenance of roads, rail track and rolling stock. While there have been major investments in port infrastructure in recent years, port operations are inefficient by international standards.
The road network remains inadequate, despite some major investments in recent years, notably the ‘Golden Quadrilateral’ and the North-South and East-West corridors. Only 20 per cent of paved
P A G E 103 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
roads are thought to be in good condition. In 2002, the government estimated that Rs1650 billion (US$34 billion) was required in order to address deficiencies in the national highway network (Ministry of Finance 2005). This represents a huge challenge, even with funding from multilateral development agencies, and an increasing reliance on Public Private Partnerships and foreign investment.
Efficiency gains have been realised in railways in recent years, but enormous levels of investment in infrastructure and technological upgrading appear to be required for the sector to meet anticipated demand for freight traffic. Labour productivity is low and there is overcharging on freight traffic in order to subsidise passenger transport (The Hindu Business Line 2006a). Significant reforms appear to be required if the sector is to take some of the load off roads.
Major investments in ports in recent years, some through Public Private Partnerships, are resulting in significant additions to capacity. With port capacity no longer acting as a constraint, the government aims to improve productivity, including through bringing ship turnaround times more into line with international standards (Ministry of Finance 2005). Increased private sector participation, including through FDI, should help raise efficiency levels. The corporatisation of major ports is a pressing priority.
Regulation India has taken major steps since 1991 in lessening regulation and economic controls, notably in industrial licensing, quantitative restrictions on imports, price controls, and areas of the economy reserved for the public sector or subject to foreign investment restrictions. It has also moved to streamline administrative procedures and commit to timelines for administrative processing and decisions in some areas, including the foreign investment approvals process.
Nevertheless, the economy, including the services sector, continues to be heavily regulated and controlled. Complex administrative procedures remain in some areas, and administrators continue to have wide discretionary powers. For example, in a recent World Bank survey 61 per cent of firms reported that government regulations occupied ten per cent or more of senior management time (World Bank 2005). The government itself recognises that ‘business still has to deal with an inefficient and sometimes still slow-moving bureaucracy’. In addition, some regulatory functions are performed at both the centre and state levels, leading to duplication of effort and additional expense for the businesses affected.
India ranks relatively poorly in terms of a number of indicators of the ease of doing business (Table 5.2). In 2006, it was ranked 116th by the World Bank in terms of an overall measure of ease of doing business.
http://finmin.nic.in/foreign_investment/fii/, accessed February 2006.
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T a b l e 5 . 2 Doing business in India Measures of the ease of doing business in selected Asian economies
Starting a business Hiring and firing Enforcing contracts
Ease of doing Difficulty Difficulty business Procedures Duration of hiring of firing Procedures Time Country (ranking) (number) (days) (index) (index) (number) (days)
China 91 13 48 11 40 25 241 India 116 11 71 56 90 40 425 Indonesia 115 12 151 61 70 34 570 Korea, Rep of 27 12 22 44 30 29 75 Malaysia 21 9 30 0 10 31 300 Philippines 113 11 48 56 40 25 360 Singapore 2 6 6 0 0 23 69 Taiwan, China 35 8 48 78 30 28 210 Thailand 20 8 33 33 0 26 390 Vietnam 99 11 50 44 70 37 343 Australia 5 2 2 0 10 11 157
Source: World Bank 2006b.
Labour law and regulations are very complex, varying from state to state. Firms become subject to a number of regulations depending on their size. Small businesses in the unorganised sector tend to be less regulated, while larger businesses may be subject to a raft of regulations.
The difficulty experienced under the Industrial Disputes Act by firms with 100 workers or more in shedding labour is often cited by business as a factor inhibiting investment and was recognised as such in the Report of the Steering Group on FDI (Indian Planning Commission 2002d). In practice, it seems that many firms are able to find their way around this constraint, although often at significant cost. While the UPA Government has signalled the need to effect reforms in this area, political opposition has made it extremely unlikely that it will be able to push ahead in the short term. While the Industrial Disputes Act only covers the industrial sector and so has no direct bearing on services companies, it impacts on India’s overall economic performance and foreign investor perceptions of India.
Many large – and not so large – companies have turned more to contract labour in recent years, although the hiring of contract labour is also heavily regulated under the Contract Labour (Regulation and Abolition) Act for establishments employing 20 or more people. Moreover, interpretation of the law is unclear. Some states have moved to rationalise and update their laws in this area. For example, Andhra Pradesh has amended its law to facilitate the employment of workers to undertake temporary and non-core activities.
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Business practices The Indian business environment can be challenging, particularly for Australian companies seeking to enter sectors still subject to significant amounts of regulation.
Corruption in India remains a pervasive concern, although there has been some progress in curbing it. India continued to perform relatively poorly in Transparency International’s 2005 Corruption Perceptions Index (CPI), despite marginal improvement since 2001 (Transparency International 2005). In 2005, India was ranked 88th of 159 countries, marginally behind China (78) but ahead of Vietnam (107), the Philippines (117) and Indonesia (137). According to the World Bank (2006c), multiple, overlapping anti-corruption agencies and lengthy legal processes have made it difficult to secure convictions. A lack of legitimate funding sources for election campaigns has created incentives to extract rents from administrative functions to fund campaign expenses or repay contributors (World Bank 2006c).
Progress in tackling corruption is evident in a number of areas. Corruption and rent-seeking are increasingly being curtailed as regulations and controls are gradually reduced and more sectors opened to competition. Deregulation reduces the number of areas in which officials can exercise discretion, and therefore limits the scope for corrupt practices. The increased adoption of e-governance to simplify transactions and promote transparency in service delivery also appears to have curbed corruption by keeping transactions between business and decision-makers at arms’ length, particularly when accompanied by the political will and strong administrative leadership needed to counter resistance from officials. The computerisation of land records in Karnataka and Maharashtra, for example, contributed significantly to reducing corruption levels, as measured by perception surveys (World Bank 2006c).
Accountability mechanisms of central and state governments have also been enhanced, yet considerable scope for improvement remains. The Central Vigilance Commission (CVC) – which is charged with tackling corruption among senior civil servants and state-owned enterprises – was given a stronger mandate in 1998 following a decision by an activist Supreme Court. Previously an advisory body to the government of the day, the CVC became an independent statutory body with the power to supervise the functioning of India’s two key investigating agencies, the Central Bureau of Investigation and the Enforcement Directorate. The CVC has since sought to limit the scope for corruption by encouraging public sector banks to computerise operations; banning post-tender negotiations with any party in procurement processes other than the lowest bidder and; publishing on its website a list of public servants who have been found guilty of corrupt practices or are facing prosecution. In 2004, the CVC was given authority to receive complaints from whistleblowers, and protect their identity (World Bank 2006c).
State governments have deployed Lok Ayukta (ombudsmen) to address high-level political corruption. The Karnataka Lok Ayukta in particular has been successful in using its power of office and media
India’s Corruption Perceptions Index (CPI) score increased from 2.7 out of 10 in 2001 to 2.9 in 2005. However this may not simply reflect improved perceptions of India’s performance on corruption. Year-to-year changes in a country’s score on the CPI can also result from changing samples and methodologies (Lambsdorff 2005).
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scrutiny to pressure corrupt officials and make corruption in service delivery a potent public issue (World Bank 2006c). An increasingly active media and civil society have played a critical role in exposing several high profile corruption cases and galvanising political support for reforms that minimise rent-seeking opportunities (World Bank 2006c, Box 13 for examples).
While increased competition, deregulation and e-governance, improved accountability mechanisms, and a more activist media and NGO community are likely to limit the scope for corruption and rent- seeking in the future, businesses contemplating the Indian market nonetheless need to be aware of their potential impact on their operations.
STRATegies for success
There are some prerequisites for building a successful business in the Indian market, as in any overseas market, such as thorough research and preparation, careful selection of a business partner or customer and the ability to take a long-term view. But approaches and ingredients for success in India are many and varied (see for example Austrade 2006a). Companies generally need to have substantial resources at their disposal in the start-up phase as success often requires a substantial initial investment of time and capital.
For many businesses entering the Indian market, it may be prudent to focus on just one region or city in India as there can be substantial differences between states in per capita incomes, economic development and the business environment. Moreover connecting transport infrastructure is often deficient. Broadly speaking, the southern and western parts of India are wealthier and have been growing more strongly than others.
Research by McKinsey (2005b) suggests that the most successful multinationals in India are those that have developed their strategy from the ground up, rather than just tailoring the strategy they have adopted in other markets. The prices of local competitors may mean that products that sell well in other markets will not sell in India. Consistent with the need to tailor products, supply chains and distribution systems to local markets, there can be strong advantages in placing an Indian in charge of local operations. If the preference is to have an expatriate in the position, there could be advantages in combining longer postings with a competent local as second in charge (McKinsey 2005b).
There is considerable merit in having full control of an operation where policy allows. Of 25 major joint ventures established by foreign multinationals from 1993 to 2003, only three have remained in business (McKinsey 2005b). Most foundered because the local partner was not in a position to invest sufficient resources to enlarge the business as quickly as the multinational had hoped. In the event of a dispute, joint venturers are also hamstrung to a degree by the time consuming nature of dispute resolution through the Indian legal system, compounded by the fact that foreign ventures cannot utilise in-house lawyers.
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Nevertheless, joint ventures can have their advantages, including the local knowledge and experience that the foreign partner can readily tap into. Parties entering into joint ventures should have congruent goals and similar ethics and values, and uncomplicated related-party transactions (Todorchevski 2005). Franchising and licensing is another option foreign companies may wish to consider for getting their brands into India.
Rapid growth and change in India’s services sector is creating substantial openings for Australian business. Australian services providers are well positioned to capitalise on emerging market opportunities in India. But, as with any moves into a new country with a different business culture, success for the newcomer may not be immediate and will depend largely on identifying and cementing the right business relationships from the start and being prepared to stay the course.
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P A G E 120 R e f e r e n c e s
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P A G E 121 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
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P A G E 122 R e f e r e n c e s
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P A G E 123 P A G E 124 Economic Analytical Unit
AUTHORSI
This report was co-authored by Robert Walters and Tim Stapleton under the guidance and direction of Richard Andrews, Executive Director of the Economic Analytical Unit in the Department of Foreign Affairs and Trade (DFAT). Robert Walters was a Director in the Economic Analytical Unit until mid-2006. Previously he directed sections in the DFAT’s Office of Trade Negotiations, Trade and Economic Analysis Branch, Europe Branch, and North Asia Division. He was Counsellor at the Australian High Commission in London between 1990 and 1994. He spent the early part of his career with the Australian Bureau of Statistics. He has a Master of Economics from the Australian National University and a Bachelor of Economics (Honours) from the University of Tasmania. He has written a number of trade-related analytical publications. Robert is now with the Commonwealth Grants Commission. Tim Stapleton joined the Economic Analytical Unit in mid-2006, having previously been a policy officer in DFAT’s East Asia Branch. Prior to this he worked in business development and financial management roles for a software development company and taught at the University of New South Wales. He has published on trade policy in the Bulletin of Indonesian Economic Studies. He holds a Bachelor of Commerce and a Bachelor of Arts from the University of New South Wales.
ECONOMIC ANALYTICAL UNITI
The Economic Analytical Unit is part of the Department of Foreign Affairs and Trade and is responsible for publishing reports analysing major trade and economic issues of relevance to Australia.
The Economic Analytical Unit has produced 43 major reports since its establishment in 1990. Electronic copies of previous reports and information on how to purchase reports are on the Unit’s website.
Contact details: Executive Director Economic Analytical Unit Richard Andrews Department of Foreign Affairs and Trade Directors RG Casey Building Evanor Palac-McMiken John McEwen Crescent Bruce Donald Barton ACT 0221 Joanne Frederiksen Australia Christopher Lang Telephone: +61 2 6261 2237 David Morgan Facsimile: +61 2 6261 3493 Deputy Directors Email: [email protected] Gita Nandan Internet site: www.dfat.gov.au/eau Angela Carey Research Analyst Tim Stapleton Office Manager Andrew Flowers
P A G E 125 P A G E 126 Acknowledgments
AcknowledgmentsI
Nicholas Coppel, as former Executive Director of the EAU, was closely involved in oversighting the initial stages of preparation of the report. The Unit’s Office Manager, Andrew Flowers provided administrative support.
Within the Department of Foreign Affairs and Trade, we would like to thank: Deputy Secretary David J Ritchie; Justin Brown, First Assistant Secretary, Trade Development Division; Deborah Stokes, First Assistant Secretary, South and West Asia, Middle East and Africa Division; Ric Wells, Head China Free Trade Taskforce and Acting First Assistant Secretary, Trade Development Division; John Griffin, Assistant Secretary, South and West Asia Branch; Nic Brown, Assistant Secretary, Trade and Economic Analysis Branch; Brendan Pearson, Assistant Secretary, Services and Intellectual Property Branch; Ron Wickes, Director, Trade Analysis Section; Tony Urbanski, Director, International Economic and Finance Section; John Fisher, Director, Peter Howarth and Phillip Stonehouse, former Directors, Kristina Hickey, former Executive Officer, Steven Yates, Graduate Trainee, India and South Asia Section; Frank Bingham, Acting Director, Sue Begley, Manager – Client Services and John Weeden, Manager – Publications, Market Information and Analysis Section; Edward Sulikowski, Director, Kerrie Burmeister, Legal Specialist and Roy Clogstoun, Executive Officer, Services Trade and Negotiations Section; and Rachel Small, Indigenous Graduate, Internet and International Broadcasting Section.
The Australian High Commission in New Delhi, the Austrade-managed Australian Consulate-General in Mumbai and Austrade’s office in Bangalore organised the Economic Analytical Unit visits to those cities and provided assistance in producing this report. In New Delhi, we thank the High Commissioner, John McCarthy, David Holly, Deputy High Commissioner, Luke Davies, First Secretary – Political, Megan Jones, Second Secretary – Political/Economic and Jibby Thomas; Michael Moignard, Senior Trade Commissioner, Tony Burchill, Trade Commissioner, and Sabina Jain, Business Development Manager, Austrade; John Webb, Education Counsellor; and David Ingham, Agriculture Counsellor. In Mumbai, we thank Ajit Mangrulkar, Acting Post Manager; Mahesh Rathod, Senior Investment Manager; Rohit Manchanda, Business Development Manager, and Joyce Pereira, Consular Officer, Australian Consulate-General. In Bangalore, we thank Chaitanya Patil, Business Development Manager.
Also within Austrade, we thank, Pat Stortz, Manager, International Liaison Unit, and Ranjit Singh, Project Manager, South East Asia, South Asia and the Pacific, Government Industry and Policy Group.
Other Australian Government agencies provided helpful information: within AusAID, Stephen Howes, Principal Economic Advisor, and Dr Chakriya Bowman, Economic Analysis & Trade Policy, and Dong Zhang, Senior Analyst, Asia Economic Section; within Invest Australia, Sandra Fox, Senior Manager, international Operations; Anthony Donnellan, Investment Manager, South Asia & Middle East; and Jarrod Mander, Investment Manager – India; within Treasury, Nathan Dal Bon, Manager, and Hassan Noura, India Desk Officer, Asia Policy Unit; within the Department ofi ndustry, Tourism and Resources, Jeff Riethmuller, former Manager, International Tourism and Bridgette Hargreave, Acting Assistant
P A G E 127 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
Director, International Tourism Team; within Australian Education International, Quentin Stevenson- Perks, Onshore Counsellor, Market Development Branch; within the Department of Communications, Information Technology and the Arts, Lindsay Barton, General Manager ICT Development Branch; within the Attorney-General’s Department, John Tucker, Special Advisor, International Legal Services Advisory Council.
State Governments in Australia also provided helpful information and suggestions. From Victoria, we thank Darren Gribble, Victorian Special Trade Envoy – India and Chairman Australia-India Council; George Di Scala, Manager Export Development – Middle East and South Asia, Office of International Business and Export, and Mark Lobo, Manager, International Investment, Invest Victoria, Department of Innovation, Industry and Regional Development. Within the NSW Department of State and Regional Development, we thank Ellen Lintjens, Senior Manager, Trade Services; Vince Smith, Senior Manager, Trade Services; Sally Williams, Senior Manager, Trade Services; Eric Winton, Senior Manager, Post Olympics; and Raji Bhatia, Manager Trade Services. In Western Australia, we thank Ashish Puri, Manager Market Development for Middle East and India, International Market Development Division, Department of Industry & Resources. In Queensland, we thank Gayle O’Brien, Director of Business Development (South Asia), Department of Premier & Cabinet (now with the Queensland Government Trade and Investment Office, Bangalore). In South Australia, we thank Donna-Marie Griffiths, Trade Manager, India and Europe, Department of Trade and Economic Development.
In addition, we thank Neville Roach AO, National Chairman, Australia-India Business Council; Professor Raghbendra Jha, Executive Director, Australia South Asia Research Centre, Research School of Pacific and Asian Studies, Australian National University; Mark Thirlwell, Program Director, International Economy, Lowy Institute; Professor Marika Vicziany, Director, The National Centre for South Asian Studies, Monash Asia Institute; Professor Frank P Larkins, Deputy Vice Chancellor (International), University of Melbourne; David Hawes, Head of Government and International Relations, Qantas; Victoria Somlyay, Head of Government and Regulatory Affairs and Monica Murray, Manager, Government and Regulatory Affairs, Westpac; Dr Pankaj Patel, General Manager Environment & Planning, SMEC; Gavin Winbanks, Director International Relations, Macquarie Bank; Edward Mandla, past President, Australian Computer Society; Fiona McAlister, Policy Advisor, International Affairs, Australian Information Industry Association; Danny Kotlowitz, Lawyer, Regulatory & Competition Legal Group, Telstra; Geoff Coates, Executive General Manager – Business Development, International Financial Services, Commonwealth Bank; Paul Mason, Head of Strategy, International Partnerships, ANZ; Anna Lavelle, Chief Executive Officer, Ausbiotech; and Henry Ledlie, Director – India, IDP Education Australia Ltd.
In Delhi, we thank: G. Srivastava, Director, Confederation of Indian Industry; Dr Sharat Kumar, Director, Development Policy Division, and Majundar, Planning Commission; S P Joshi, Representative – India, International growth Specialists, Australian business Ltd; Kiran Karnik, President, NASSCOM; Ashok Juneja, Corporate Director, Network technology & Projects, Bharti Tele-Ventures; Dr Rangarajan, Chairman, Prime Minister’s Advisory Council; Dr Rashmi Banga, Economist, UNCTAD; P.K. Dash, Joint Secretary, Ministry of Commerce & Industry; Dr Bhide, Senior Research Counsellor, and Devendra
P A G E 128 Acknowledgments
Kumar Pant, Fellow, National Council of Applied Economic Research; Raghvan Srinivasan, Consulting Editor, Business Standard; Anjan Roy, Advisor, FICCI; Ashish Narain, Economist, World Bank; Ajay Sahai, Director General, Federation of Indian Export Organisations; and Dr Arpita Mukherjee, Senior Fellow, Indian Council for Research on International Economic Relations.
In Bangalore, we thank: Dr Brian Cohen, Chief Technology Officer, Asia, IBAHealth; Prof S. Sadagopan, Director, International Institute of Information Technology, Bangalore; K. Dinesh, Co-founder and Member of the Board, Infosys; Murali Krishnan, President – Group Finance, Biocon Ltd; Wayne Lewis, Commissioner to India, State Government of Victoria; and Radhika Choudary, Executive Director, and Dr Anand Kumar, Hon Director, Association of Biotechnology Led Enterprises.
In Mumbai, we thank: Phil Michell, Director and Country Head – India, ANZ Capital Private Ltd; Manfred Bertram, Managing Director, ANZ - OTSS India; Sarosh Irani, Director, Macquarie Securities (India) Pvt. Ltd.; D. P. Rath, Director, R. K. Patnaik, Adviser, L. Lakshmanan, Assistant Adviser, Sanjay Hansda, Assistant Adviser, and Raj Rajesh Kumar, Research Officer, Department of Economic Analysis & Policy, Reserve Bank of India; Pankaj Baliga, Vice President, TATA Consultancy Services; Pankaj Baliga, Vice President, TATA Consultancy Services; Kalpana Morparia, Joint Managing Director, ICICI Bank; Sundeep Bhandari, Regional Head, Global Markets – South Asia, and Shuchita Mehta, Economist, Global Markets, Standard Chartered Bank; Dr Archana Mahale, Deputy Director, Bombay Chamber of Commerce & Industry; and Dr Ajit Ranade, Group Chief Economist, Additya Birla Management Corporation.
P A G E 129 P A G E 130 EAU Publications
Also by the Economic Analytical UnitI
ASEAN: Building an Economic Community Published July 2006 (ISBN 1 920959 89 0), 103 pages
Unlocking China’s Services Sector Published February 2006 (ISBN 1 920959 47 5), 113 pages
Education Without Borders: International Trade in Education Published September 2005 (ISBN 1 920959 51 3), 69 pages
More Than Oil: Economic Developments in Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates Published September 2005 (ISBN 1 920959 46 7), 95 pages
Australia and the United States: Trade and the Multinationals in a New Era Published June 2005 (ISBN 1 920959 36 X), 85 pages
Malaysia: An Economy Transformed Published February 2005 (ISBN 1 920959 25 4), 119 pages
Papua New Guinea: The Road Ahead Published November 2004 (ISBN 1 920959 23 8), 172 pages
Solomon Islands: Rebuilding an Island Economy Published July 2004 (ISBN 1 920959 08 4), 139 pages
South-South Trade: Winning from Liberalisation Published June 2004 (ISBN 1-920959-07-6), 42 pages
Economic Aspects of Combating Terrorism in the Transport Sector Published May 2004 (ISBN 1 920959 00 9), 52 pages
African Renewal: Business Opportunities in South Africa, Botswana, Uganda, Mozambique and Kenya Published November 2003 (ISBN 0 646 42822 5), 135 pages
China’s Industrial Rise: East Asia’s Challenge Published October 2003 (ISBN 0 9750627 4 3), 75 pages
Globalisation: Keeping the Gains Published May 2003 (ISBN 0 646 42270 7), 103 pages
Connecting With Asia’s Tech Future: ICT Export Opportunities Published November 2002 (ISBN 0 642 50244 7), 191 pages
China Embraces the World Market Published November 2002 (ISBN 0 642 50227 7), 200 pages
P A G E 131 INDIA’S SERVICES SECTOR UNLOCKING OPPORTUNITY
Changing Corporate Asia: What Business Needs to Know (2 parts) Published March 2002 (ISBN 0 642 48780 4/0 642 48781 2/0 642 48779 0), 87 and 230 pages
India: New Economy, Old Economy Published December 2001 (ISBN 0 642 56583), 172 pages
Investing in Latin American Growth: Unlocking Opportunities in Brazil, Mexico, Argentina and Chile Published August 2001 (ISBN 0 642 51879 3), 294 pages
Indonesia: Facing the Challenge Published December 2000 (ISBN 0 642 70501 1), 205 pages
Accessing Middle East Growth: Business Opportunities in the Arabian Peninsula and Iran Published September 2000 (ISBN 0 642 47659 4), 160 pages
Transforming Thailand: Choices for the New Millennium Published June 2000 (ISBN 0 642 70469 4), 216 pages
Asia’s Financial Markets: Capitalising on Reform Published November 1999 (ISBN 0 642 56561 9), 376 pages
Korea Rebuilds: From Crisis to Opportunity Published May 1999 (ISBN 0 642 47624 1), 272 pages
Asia’s Infrastructure in the Crisis: Harnessing Private Enterprise Published December 1998 (ISBN 0 642 50149 1), 250 pages
The Philippines: Beyond the Crisis Published May 1998 (ISBN 0 642 30521 8), 328 pages
The New ASEANs - Vietnam, Burma, Cambodia and Laos Published June 1997 (ISBN 0642 27148 8), 380 pages
A New Japan? Change in Asia’s Megamarket Published June 1997 (ISBN 0 642 27131 3), 512 pages
China Embraces the Market: Achievements, Constraints and Opportunities Published April 1997 (ISBN 0 642 26952 1), 448 pages
Asia’s Global Powers: China-Japan Relations in the 21st Century Published April 1996 (ISBN 0 642 24525 8), 158 pages
Pacific Russia: Risks and Rewards Published April 1996 (ISBN 0 642 24521 5), 119 pages
Iron and Steel in China and Australia Published November 1995 (ISBN 0 642 24404 9), 110 pages
P A G E 132 EAU Publications
Growth Triangles of South East Asia Published November 1995 (ISBN 0 642 23571 6), 136 pages, only available online
Overseas Chinese Business Networks in Asia Published August 1995 (ISBN 0 642 22960 0), 372 pages
Subsistence to Supermarket: Food and Agricultural Transformation in South-East Asia Published August 1994 (ISBN 0 644 35093 8), 390 pages
Expanding Horizons: Australia and Indonesia into the 21st Century Published June 1994 (ISBN 0 644 33514 9), 364 pages
India’s Economy at the Midnight Hour: Australia’s India Strategy Published April 1994 (ISBN 0 644 33328 6), 260 pages
ASEAN Free Trade Area: Trading Bloc or Building Block? Published April 1994 (ISBN 0 644 33325 1), 180 pages
Changing Tack: Australian Investment in South-East Asia Published March 1994 (ISBN 0 644 33075 9), 110 pages
Australia’s Business Challenge: South-East Asia in the 1990s Published December 1992 (ISBN 0 644 25852 7), 380 pages
Southern China in Transition Published December 1992 (ISBN 0 644 25814 4), 150 pages
Grain in China Published December 1992 (ISBN 0 644 25813 6), 150 pages
Korea to the Year 2000: Implications for Australia Published November 1992 (ISBN 0 644 27819 5), 150 pages
Australia and North-East Asia in the 1990s: Accelerating Change Published February 1992 (ISBN 0 644 24376 7), 318 pages
The EAU’s website, www.dfat.gov.au/eau, provides access to recent reports, full publication catalogues and details of briefing papers, as well as executive summaries and tables of contents of earlier reports.
Hard copies of the reports can also be ordered through www.dfat.gov.au/eau.
P A G E 133
Optimism abounds in India. Entrepreneurial spirit was Optimism abounds in India. Entrepreneurial spirit was unleashed by wide-ranging liberalising reforms that unleashed by wide-ranging liberalising reforms that commenced in 1991. The Indian economy has shifted to a commenced in 1991. The Indian economy has shifted to a much faster growth trajectory, led by the dynamism of its INDIA’S SECTOR: Unlocking Opportunity SERVICES much faster growth trajectory, led by the dynamism of its INDIA’S SECTOR: Unlocking Opportunity SERVICES services sector – particularly high-end, knowledge-intensive services sector – particularly high-end, knowledge-intensive services exports. Studies by a number of prominent analytical services exports. Studies by a number of prominent analytical organisations are now projecting that India could outperform organisations are now projecting that India could outperform all of the world’s major economies over the next fifty years. By all of the world’s major economies over the next fifty years. By 2050, it could be the third largest economy in the world by a 2050, it could be the third largest economy in the world by a significant margin. Such developments would profoundly shift significant margin. Such developments would profoundly shift the world’s centre of economic gravity. the world’s centre of economic gravity.
This report does not seek either to substantiate or to disprove This report does not seek either to substantiate or to disprove these rosy projections. Instead we ask: How might it happen? these rosy projections. Instead we ask: How might it happen? Is there a plausible path from today’s India to the projected Is there a plausible path from today’s India to the projected giant economy of 2050? What opportunities might successful giant economy of 2050? What opportunities might successful pursuit of that path generate for Australian services pursuit of that path generate for Australian services providers? And finally, what factors need to be taken into providers? And finally, what factors need to be taken into account along the way as Australian companies consider account along the way as Australian companies consider whether they should be seeking to participate directly in whether they should be seeking to participate directly in India’s growth? India’s growth?
The report looks beyond headline services such as The report looks beyond headline services such as information technology and IT enabled services to examine information technology and IT enabled services to examine emerging export and investment opportunities in education, emerging export and investment opportunities in education, telecommunications, financial services, infrastructure, telecommunications, financial services, infrastructure, construction management, tourism, film, healthcare, sports construction management, tourism, film, healthcare, sports and related infrastructure, biotechnology, mining, retail, and related infrastructure, biotechnology, mining, retail, logistics and professional services. And it highlights the logistics and professional services. And it highlights the successes of some of the Australian services providers successes of some of the Australian services providers behind Australia’s increasingly dynamic services trade behind Australia’s increasingly dynamic services trade relationship with India. relationship with India.
www.dfat.gov.au/eau www.dfat.gov.au/eau INDIA’S SERVICES SECTOR INDIA’S SERVICES SECTOR Unlocking Opportunity Unlocking Opportunity DFAT DFAT Australian Government Australian Government Department of Foreign Affairs and Trade Department of Foreign Affairs and Trade Economic Analytical Unit Economic Analytical Unit