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AN OVERVIEW OF INDIA January 2007 Information contained in this document is prepared by The Boston Consulting Group, Lda Summary INDIA FACTS 5,000 year old civilization Population of 1.1 billion World’s largest democracy World’s 10th largest economy (GDP $800 Billion) -4th largest in PPP terms Second fastest growing large economy (GDP rate 8%) 336 tribes, 325 languages, 1,652 dialects 18 official languages 7 classical dance forms, >45 folk dances 5600 dailies, 15000 weeklies, 20000 periodicals in 21 languages with total circulation ~ 142 Mn Parliamentary form of Government 29 states, 5 union territories Largest English-speaking nation in the world 2nd largest pool of scientists and engineers 3rd largest standing army, over 1.5 Mn strong Copyright BCG -1- History INDIA’S 5000 YEAR HISTORY MARKED BY SEVERAL, VERY DIFFERENT PHASES BC 3300 • Earliest urban civilization in India • Centred around ‘Indus’ river valley • Gives India its name Indus Valley Civilization BC 1300 • Pastoral Aryans from north-west • Origin of the Sanskrit language • Principal Hindu texts & epics written Vedic Civilization BC 500 • Advent of Jainism and Buddhism • Asoka’s message of peace • Golden age for Arts & Sciences Middle Hindu Kingdoms AD 1200 • Arab / Turk / Afghan invasions • Introduction of Islam • Qutub Minar erected Islamic Sultanates AD 1525 • Turko-Persian invasion • Series of great Mughal monarchs • Mughal architecture, including Taj Mahal Mughal Era AD 1750 • French, Portuguese & English colonies • English emerged as strongest power • Phase of modernization but oppression Colonial Era AD 1857 • Rise of intellectual Indian politics • Long struggle for freedom • Emergence of Gandhi and other leaders Independence Movement AD 1947 • Independence of India • Division into India & Pakistan • Sovereign Democratic Republic Republic of India Today Copyright BCG -2- History SIGNIFICANT CONTRIBUTIONS ACROSS MANY FIELDS 3300-500BC Advent of Hinduism Birth of Buddhism & Jainism, introduction of Christianity in India Yoga – now practiced worldwide Ayurveda – earliest school of medicine Sanskrit Takshila – world's first university Invention of decimal system, invention of zero, algebra and calculus Religions Sciences Education Literature 500BC-1000 AD 1700-1950 AD Introduction of Islam Arrival of Zoroastrianism Strengthening of Sikhs JC Bose - pioneer of wireless communication Raman Effect Introduction of English Geetanjali by Tagore Principal Hindu texts & epics including the Vedas Ajanta & Ellora Caves Architecture Others 1000-1700 AD Islamic architecture – including the Taj Mahal, Red Fort, Qutub Minar, city of Fatehpur Sikri Non-violent movement for freedom struggle No fights for power, never invaded any other country Copyright BCG -3- Economy INDIA IS CURRENTLY THE 10TH LARGEST ECONOMY IN THE WORLD GDP ($ Bn in 2005) United States 12456 Japan 4560 Germany 2798 China 2264 United Kingdom 2227 France 2125 Italy 1765 Canada 1132 Spain 1126 India 796 Brazil 796 South Korea 788 Mexico 768 Russia 764 Australia 708 Source: World bank, Analyst reports, RBI database, BCG analysis Copyright BCG -4- Economy INDIA’S CURRENT GROWTH IS UNPRECEDENTED IN ITS HISTORY GDP Growth Rate (1995-2006) 12 10 8.1% 8.6% 8 6.1% 6 4 2 India's Average GDP growth (95-05) 4.9% 5.5% 3.1% 2.8% 3.3% 2.8% 1.2% 0 -2 -4 Max -6 Average -8 Min -10 India (6474) India (7484) India (8494) India (9505) India (0506) China Taiwan UK Japan USA Second fastest growing large economy Source: World Bank; IMF Copyright BCG -5- Economy INDIA EXPECTED TO BE THE 4TH LARGEST ECONOMY BY 2025 Share of World GDP 1820 2003 2025E 2050E China ~29% (1) ~4% (7) ~17% (2) ~27% (1) India ~16% (2) ~2% (12) ~5% (4) ~17% (3) US ~1.8% (9) ~32% (1) ~31% (1) ~21% (2) 1.12 Bn people 0.3 Bn people 1.0 Bn people Note: Figures in bracket indicate GDP world ranking Source: Angus Maddison's OECD Book "The World Economy – A Millenial Perspective", IMF, Goldman Sachs projections; BCG Analysis Copyright BCG -6- Economy INDIA’S PATTERN OF GROWTH IS UNIQUE India Real GDP CAGR (95-05) Services sector has grown strongly % share of GDP 100 37.9 75 30 21 Agriculture ~2.1% 27 Industry ~6.2% 51 Service ~8.3% 57.4 27 24.4 50 14.7 25 27.9 37.7 43 1979-80 1994-95 0 1950-51 2004-05 Source: RBI Copyright BCG -7- Economy SIGNIFICANT IMPROVEMENT ACROSS KEY ECONOMIC INDICATORS 1996 2005 13.7%(1) 8.1% Indicator 6.3% Interest rate on 5 yr G-sec paper + 6.4% Inflation (WPI) + Exports ($ Bn) + Current a/c deficit (% of GDP) + Forex reserves ($ Bn) + Forex reserves as months of imports + Currency appreciation + Fiscal deficit + 79.3 31.8 -1.8% -0.9% 135 17 14.3 4.7 -9.5% 5.1% Trend -0.5% 4.0% (1) 1997 data Source: Analyst reports; literature review Copyright BCG -8- Economy INDIA’S GROWTH DRIVEN BY GROWTH OF DOMESTIC CONSUMPTION Higher income segments showing faster growth No. of HH 164 183 202 210 180 150 5 7 18 12 13 28 24 Income >$3000 21 $2000-$3000 41 $1350-$2000 CAGR (%) 14.4% 9.6% 7.1% 120 46 Addition of ~65 Mn HH and ~350 Mn into consumption class income >$1350 pa) over 10 years • ~ size of the American population 69 90 80 $650-$1350 4.9% 36 <$650 -7.1% 60 88 61 30 0 '94-'95 '00-'01 '06-'07(Exp) (1) Expected figures Note: Income classification (at 2000-01 prices, per annum. calculated by applying 5% inflation rate to 1994-95 prices); Assumed exchange rate of $1 = Rs. 50 for 2000-01; Assumed HH size of 5.5 across years Source: NCAER, SOI; BCG analysis Copyright BCG -9- Economy INDIA’S ECONOMIC PAST HAS INFLUENCED THE PRESENT Five Phases of India’s Economy Post Independence 1950-1965 Industrial foundation • Industrial growth driven by government investments in large public sector enterprises • Government investments contributed 53% of total Gross Capital Formation and 92% of all investments in greenfield projects • Focus on key infrastructure industries and on being self-sufficient CAGR =3.5% •Strong local players in some key industries 1965-1980 Import substitution • Oil shock (1970s) and devaluation of rupee • Greater emphasis on self-sufficiency and import substitution • Licensing restrictions placed on several industries • Continued public sector investments 1980-1990 De-licensing • Initial and partial delicensing in some key sectors • Increased growth of private companies • Opening of capital goods imports • Formation of the first MNC-govt JV – MarutiSuzuki • Nationalization of banks and other industries CAGR =4% 1990-2000 Liberalisation 2000 onwards Global competitiveness • Economic and payments crisis • Removal of most import controls • Broad reforms, reduction of licensing and protection • Resurgence of key industries • Higher competition, access to technology and imported inputs • Indian companies acquiring companies abroad, gaining global identity • Higher share of private sector in fixed investment • Outsourcing boom • Increased threat perception from China CAGR = 5% •Development of process expertise •Development of local capital equipment industry •Mindset of asset optimization to avoid imports •Focus on flexibility rather than scale CAGR = 6% •Cost reduction and restructuring waves to achieve competitiveness CAGR = 7-8% •Innovation and global expansion Note: GDP numbers are approximate Copyright BCG - 10 - Demography INDIA WILL BENEFIT FROM A DEMOGRAPHIC DIVIDEND 2020 India Demographic Profile Age group 80+ 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 60 -60 China Demographic Profile Age group 80+ 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 40 -40 20 -20 0 20 60 40 Mn people 60 -60 France Demographic Profile Age group 80+ 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 40 -40 20 -20 0 20 60 40 Mn people 3 -3 2 -2 1 -1 0 1 2 3 Mn people 20 - 35 age group : 20 - 35 age group : 20 - 35 age group : 325 mn people (~25 %) 308 mn people (~21 %) 11 mn people (~17 %) Source: CII Conference 2002; CSFB Report; UN Population Division; BCG analysis Copyright BCG Female Male - 11 - India’s challenges INDIA’S REGIONAL DIVERSITY POSES UNIQUE CHALLENGES... EAST NORTH • • • • • Jammu & Kashmir Main Language: Hindi Main Religions: Hindu, Sikh, Muslim Agricultural Hub GDP/Cap: $580 22.4% of India GDP Punjab 18 Himachal Pradesh 4 Haryana 16.4 Rajasthan 23.2 WEST • Main Languages: Hindi, Gujarati, Marathi • Religions: Hindu, Parsi, Muslim • Financial Hub • GDP/Cap: $790 • 26.8% of India GDP Gujarat 37.2 Bihar 12.5 Seven Sisters 2.5 Jarkhand Madhya Pradesh 8.8 West Bengal 22.5 42.2 Chattisgarh 8.6 Orissa CENTRAL 12 Maharashtra 74 Goa 2.1 Main Languages: Hindi, Bengali Religions: Hindu Natural Resources Hub GDP/Cap: $415 18% of India GDP Delhi 18.6 Uttar Pradesh 47.8 SOUTH • Main Languages: Tamil, Malyalam, Kanada • Religions: Hindu, Christian • Technological Hub • GDP/Cap: $717 • 26.6% of India GDP • • • • • Andhra Pradesh 41 Karnataka 29.4 State GDP Per Capita (US$) • • • • Main Languages: Hindi Religions: Hindu GDP/Cap: $430 5.8% of India GDP Below 400 400-700 Kerala 19.9 Tamilnadu 37.4 700-900 More than 900 Note: Numbers Under State Names Indicate State GDP (US$Bn) for 2004 Source: Statistical Outline of India, Central Statistical Organisation Copyright BCG - 12 - India’s challenges Backup ...AS DOES THE RURAL-URBAN DIVIDE Key Indicators Rural Contrasting Penetration Urban Rural Urban Per Capita GDP ($) CTVs 3 1175 470 MPCE(1) ($) 13 Refrigerators 4 24 % of Population Shampoos 80 66 35 Tele-density (%) Two-Wheelers 1.7 26.2 80 -60 60 -40 40 -20 20 0 -80 54 15 Adult Literacy (%) 59 34 Cable TV 26 74 30 7 20 40 60 80 25 -80 80 -60 60 -40 40 -20 20 0 20 40 60 80 % (1) Monthly Per Capita Consumption Expenditure Source: NCAER, Literature Review, BCG Analysis Copyright BCG - 13 - India’s challenges CONTINUED SIGNIFICANT POVERTY... Distribution of households (in ’000s) by income class 20 Rural vs. urban split Super Rich > 1 cr 40 Sheer Rich 50 lacs-1 cr 201 Clear Rich 20-50 lacs 546 Near Rich 10-20 lacs 1,712 Strivers 5-10 lacs 9,034 Seekers 2 -5 lacs 41,262 Aspirers 90,000-2 lacs 135,378 Deprived < 90,000 11% 48% 89% 42% 85% 19% 20% 35% 80% 19% 25% 29% 75% 18% 30% 24% 17% 70% 36% 18% 16% 64% 48% 52% 6% 11% 82% 1% 2% 18% 0.5 Rural Copyright BCG 18% 15% 0 (1) Excluding Delhi and Mumbai Note: Income figures in Rs. per annum Source: NCAER Urban agglomeration 1 Urban 0 0.2 Delhi & Mumbai 0.4 0.6 Top 10 cities-(1)14 - India’s challenges ...AND WIDENING INCOME DISPARITY Copyright BCG - 15 - India’s challenges EXTREME VARIATIONS IN INFRASTRUCTURE Few spectacular successes... ... but lots more to be done Delhi Metro (USD 2 billion) Golden Quadrangle (USD 15 billion) Copyright BCG - 16 - India’s challenges CHALLENGES OF MANAGING GOVERNMENT COALITIONS OFTEN HELD RESPONSIBLE FOR SLOWER PACE OF REFORMS Appeasement of Many Identities • Indian National Congress (INC) dominates politics Independence • INC led by Nehru-Gandhi family retain - 1970’s power 1978 - 79 Caste • First non-congress coalition government ‘Janata Party’ • Retains power for only a short period 1980 - 1990 • Political instability - 7 governments in 10 years • INC only party able to maintain a stable 5 year government 1999 - 2004 • First stable non INC coalition government led by Bharatiya Janata Party (BJP) Region Many political identities Economic principles Religion 2004 - 2005 • INC wins election by narrow margin • Coalition government with regional parties and Communist Party of India Source: Election Commission Of India ; Press Review Copyright BCG - 17 - India’s challenges AND CERTAIN FEATURES THAT HAMPER BUSINESS EFFICIENCY Comparison Of Various Aspects Of Setting Up A New Business 75 India 71.0 Ranking of Countries As Per Corruption Perception Index, 2005 200 61.7 Asia-Pacific 150 50 39.7 35.3 100 25 126 11.0 50 78 7.9 158 137 88 39 0 0 No. of procedures in setting up a business Time (days) to set up a business 1 Iceland Cost (% of income per capita) for setting up business China Malaysia Russia India Bangladesh Indonesia Source: World Bank Economy Rating 2005; Literature Review, Transparency International Corruption Perception Index 2005 Copyright BCG - 18 - India opportunity SEVERAL FACETS TO THE INDIA OPPORTUNITY 1. Large and growing markets 4. Attractive LCC sourcing base 2. A source of talent 3. Base for business process offshoring Copyright BCG - 19 - 1. Large and growing markets India opportunity SEVERAL INDIAN CONSUMER MARKETS BECOMING ATTRACTIVE FMCG Size: US$14Bn Growth: 9% Consumer Durables Size: US$5.1Bn Growth: 15-20% Travel & Tourism Size: US$13Bn Growth: 8.9% Apparels Size: US$20Bn Growth: 15-25% Media & Entertainment Size: US$11Bn Growth: 15-17% Retail Size: US$210Bn Growth: 10-15% Copyright BCG - 20 - 2. A source of talent India opportunity INDIA HAS A STRONG TALENT BASE A large pool of skilled people... ...with high end qualifications... ...and extremely cost efficient Availability of skilled labour, 2005 Availability of qualified engineers, 2005 Total compensation for engineers, 2004(1) India 7.6 India USA 7.6 USA Germany 7.1 Russia Brazil Mexico China 6.5 5.3 5.0 4.3 8.6 7.2 Germany Mexico 106 105 Russia 6.4 Russia Brazil 6.3 USA Germany 6.3 Brazil 5.1 Mexico China 4 135 India China 94 52 43 33 India is the largest English speaking nation in the world India has the second largest pool of Scientists and Engineers in the World (1) Compensation is (US$ ‘000) and includes salary plus bonuses Note: Survey results: 1=low; 10 = high Source: IMD world competitiveness Yearbook 2005 Copyright BCG - 21 - 2. A source of talent India opportunity THE INDIA WORKFORCE SURPLUS IS LIKELY TO CONTINUE While Other Countries Face Shortages Potential surplus population in working age group (2020) Germany -3 Mn UK -2 Mn 0Mn -1 Mn Iraq Ireland US -17Mn France Spain -3 Mn Czech Republic 2Mn -3 Mn -2 Mn 2Mn Israel Iran 0Mn 3Mn 4Mn Egypt Mexico -6 Mn Turkey Italy 5Mn Russia China Pakistan 19 Mn 47 Mn -10 Mn -9 Mn Japan 5Mn 7 Mn Bangladesh Philippines 4Mn India Vietnam 1Mn Malaysia 3Mn 5Mn Indonesia Brazil -0.5 Mn Australia Note: Potential workforce surplus is calculated keeping the ratio of working population (age group 15 – 59) to total population constant and under the assumption that this ratio needs to be broadly constant to support economic growth. Therefore, India will have 47 Million more people in the working age group/total population by 2020 compared to today, while France will have a deficit of 3 Million people in the working age group compared to today. Source: U.S. Census Bureau; BCG Analysis - 22 Copyright BCG 3. Base for business process off-shoring India opportunity SEVERAL FIRMS HAVE OUTSOURCED OPERATIONS TO INDIA Select Examples Financial Services Industrial Goods Copyright BCG Consumer/Services/Hi-Tech - 23 - 3. Base for business process off-shoring India opportunity MNCs DEEPENING R&D PRESENCE IN INDIA 4. Fundamental research Level of expertise 3. End-to-end product development for global markets 2. End-to-end product development for emerging markets GE: 1700 people; 77 patents; 2 products 1. Selected steps in product development Akzo Nobel: 75 of 400 people in India TI: 900 people; 225 IPs, 20 products Time/Extent of success Source: Literature, BCG interviews Copyright BCG - 24 - 4. Attractive LCC sourcing base India opportunity INDIA HAS POTENTIAL TO BE A GLOBAL SOURCING HUB ACROSS MANY INDUSTRIES Manufactured products outsourcing projected to be ~€50 Bn by 2015 € Bn 60 Where is this going to come from? Automobiles • Even within our different factories worldwide we believe India will be most competitive for small cars - BG Lee, Executive Director, Hyundai Motor Company CAGR: 25% ~50 50 40 30 22% 43 20 10 0 Engineering goods • Our proposal to source transmission from India had competition from China and Philippines. We believe it would be more economical in India - Atsushi Toyoshima, Managing Director, Toyota Kirloskar Motor 26% 4.3 2004 8.5 2007 Pharmaceuticals • Shasun chemicals and drugs - sole supplier of Nizatidine, Eli Lilly's ~€190 Mn anti ulcer drug - 60% of Knoll Pharma's global requirement of Ibuprofen 2015 Source: Business World – 12 May 2003; BCG analysis Copyright BCG - 25 - JUST ANOTHER DAY IN INDIA... Copyright BCG - 26 -