There are certain sectors that are very important for the development of an economy & Indian economy is no exception. In the following sections, we provide an overview of the sections that have played a very important role for the development of Indian economy. Steel is one of the basic industries of an economy. It is a basic industrial metal because of its strength, it is cheap & it is a bad conductor of electricity. The level of prosperity in an economy is reflected in the per capita consumption of steel. India is the 9th largest producer of steel in the world but it has got the one of the lowest per capita steel consumption. The steel industry, as of now, is passing
through a bad phase because of the South – East Asian crisis & consequent dumping
by these countries, out dated steel plants, global recession & over all recession in
the Indian economy. Even a global producer like ISPAT could not escape this recession
& was badly hit. Demand for steel has gone down substantially, because of recession in
other major sectors, where steel is used. Also due to price deregulation, input costs have
risen & Indian prices have become more aligned with the global prices, which are
falling for quite some time now.
Imports Import of finished steel were 1.1 mln tons in 1999, down 30% as compared to 1998. Import of long products was 36000 tons in 1999, down by 33% as compared to 1998. Import of flat products was 1.1 mln. tons, again down by 30%. There was also the problem of dumping. To prevent dumping & under – invoicing, floor prices were fixed for seven flat steel product categories in December 1998. Exports Export of finished steel was 1.87 mln. tons in 1999, down 21% as compared to 1998, the export of flat products dropped by 2.35% in 99 & export of hot rolled coils increased by 6%. The main reason for a decrease in the exports was South East Asian crisis because this was one of the major markets for Indian steel & dumping by these countries in other countries. As a result of the crisis, their currency was devalued & their exports became more competitive. Future outlook In light of above, the coming future doesn’t seem to be any good for the steel industry. Although, the economy has picked up in recent past, but the steel sector doesn’t seem to pick up. With an increase in industrial activity, the demand of steel is likely to increase in future. The companies have to gear up to face the challenges that are standing in front of them. A consolidation of sorts is required in the
sector. Because of availability of license, many companies got into steel who don’t
have competencies in steel. The sector has to consolidate, only then it can become
competitive at global levels. In future, it wouldn’t be a surprise, if one sees some
mergers & acquisitions in the sector. If companies accept new technologies & new
challenges, control their costs & the economy continues to grow at the same pace for
some time, this sector will surely pick up. Cement is the most preferred building material in India. The demand for cement in an economy can be linked to the economic activity in the country. This is because the level of infrastructure in the economy drives the demand of cement. The Indian cement industry is also sensitive to demand fluctuations caused by housing sector, which accounts for nearly 60% of domestic cement consumption. It is a highly fragmented industry with a few large players & large number of small players. In recent past, there was recession in the global markets & India was no exception. So the cement industry saw one of its most bad phases in the recent past. Demand for cement decreased during 96 & input costs increased. At that point of time, these companies decided to concentrate on their core competencies & to hive off their cement business. TISCO was a perfect example for this. This is the reason why we are witnessing such a huge number of mergers & acquisitions in the sector. The global cement giants have got into the sector & they are trying hard to flex their muscle in the country. The best way for them is to acquire an established company, which gives them a ready market & an established plant. It also makes them enjoy the benefits of economies of scale. Production & consumption trends (million tons per annum)
The above figures show that since 96, there was a downtrend in the cement industry & that was the time when there was recession in the economy. Since 1999, the sector has again looked up due to increase in the industrial activity & growth in the economy. This shows how cement off take is linked to the level of economic activity in the economy. Future outlook At present, Indian cement industry is going through a major restructuring exercise through all these mergers & acquisitions. The logic behind these mergers is to increase production capabilities & market share. Players in the industry are concentrating hard on decreasing their costs because that will be a major factor for competition in the future, with all these MNC firms in the country. They have to adopt new technology to improve productivity & decrease costs. Only then, Indian firms will be able to compete with their global counterparts. The software sector continues to be the hottest sector of the economy. Global IT industry, valued at around $700 bln. is expected to grow at around 12%. India is uniquely place in the global software market & is expected to remain a dominant player in the coming years because of the cost & the language advantage. Growth for software services is likely to remain robust, driven by major technological changes. Last year, the industry grew by 46%. Domestic software industry was estimated at Rs. 35 bln. in 98. The industry is expected to grow at a rate of 40% p.a. The major growth areas will be Internet & e - commerce, CRM, IT enabled services & education & training segment. In software industry in India, till now, demand is far outstripping supply. The demand for competent software pros is increasing & the attrition rate in the industry is very high. Seeing such a robust growth, the Government is also taking initiatives to boost IT sector. It is providing various initiatives to the industry so that the industry can continue to grow. This industry contributes a lot to the foreign reserves of the country. Prospects for the future:
FMCG is the fast moving consumer goods. These are the goods that are generally there on every household’s budget & which are bought once at least a month. This sector, in India, is characterized by heavy competition & mainly based on product attributes. It is a low capital intensive industry, which is marketing driven. It’s the marketing efforts of the organization that drives the business. It is also characterized by the unorganized sector, which forms a major part of it. Brand equity, marketing strategy & the distribution network are the most critical factors for this sector. Consumer spending according to income group last year (Rs. in billion)
The spending in this sector reflects the standard of living of people living in the country. The better the standard of living, the more will be spending on consumer products. Future Outlook After the entry of these MNC firms, we can expect a bit of consolidation in the industry. We have already seen HLL acquiring "Lakme brand". Such type of acquisitions might happen again. A more recent example is HLL’s acquisition of Modern Foods. So a slight consolidation in the industry can be expected. Volumes drive the industry & the margins are low due to intense competition. The prosperity in rural areas is increasing & therefore the companies have to increase their penetration in the rural market because it has far outstripped the urban markets as far as demand growth is concerned. That market is still untapped & dominated by the unorganized sector. With a increase in GDP & income levels, the demand is also expected to increase. Since 91, there has been a progressive reduction in excise duties on major FMCG product categories. Media reach has increased in the rural market & with the entry of MNC firms, we can expect some action in the sector. The sector is expected to grow by 15%. The Pharma sector has been attracting a lot of attention in recent past mainly because of advances in technology & their resultant impact on the sector. Pharmaceuticals are chemicals, which are converted to medicine forms for the patients. In its purest chemical form, they are called bulk drugs & in its medicine form, they are called formulations. The Indian pharma sector is different from its global counterpart mainly because of the regulatory structure governing the industry covering the patents, price controls etc. The total size of the industry is approximately Rs. 160 bln., 65% of which is controlled by the organized sector. Formulations account for more than 75% of the market. The growth rate of the sector has been around 17% since 91. But in spite of this growth, Indian share in the global market is just 1.5% of the total sales. Initially, MNC firms had a near monopoly in the Indian pharma sector accounting for around 75% of the total sales. In 1970, the Indian Patents Act was introduced. Since then, the share of MNC firms has fallen from 75% to 35%. In the same year, Drug Price Control Order (DPCO) was also introduced which put a ceiling on the prices of certain mass – usage bulk drugs & their formulations. Indian firms have realized the importance of R & D for the success & they have increased their R & D expenditure to discover new drugs. The R & D expenditure has risen from Rs. 0.5 bln. in 86 to Rs. 2.5 bln. in 99. Over 60% of the bulk drugs & 15% of the formulations manufactured in the country are exported. Following is the production scenario in the sector at the end of 99: Production (Rs. in billion.)
Pharma sector earns a lot of foreign exchange for the country. In fact, it is one of those few sectors, which are net foreign exchange earners for the country. As the sector is highly regulated, the factors that will determine the success are strong R & D capabilities, backward integration into bulk drugs, a strong distribution network, high brand equity, discovery & launch of high potential molecules & a strong sales force. Future outlook The sector holds a lot of potential in the near future. The WTO also has serious implications for the Indian pharma sector. As of now, process patent registration is allowed in India. As per the WTO agreement, 2005 onwards, India will grant product patent recognition to all bulk drugs developed after 2005. The transition period in preparation of WTO has already commenced. The established domestic players will like to grab a large part of the domestic formulations market before MNC firms launch their products post WTO. To achieve this, they are already expediting their product launches & looking for brand acquisitions. So the industry is expected to consolidate in the near future. Post WTO, MNC firms will launch their top of the line new products in India. They will get the exclusive marketing rights for these products. MNC firms, which haven’t entered in to India till now, will enter into joint ventures with local players to license their new products. Again the fall out of this is, the sector will witness consolidation in which the small players will be acquired by a few big ones & there would only be few big players. Globally, there is a trend coming up in the pharma sector, mergers & acquisitions. That’s because, the margins are shrinking & this sector also works on volumes. So everybody wants to grab market share. The recent acquisition of Warner Lambert by Pfizer is a case in point. Recently, Dr. Reddy’s Labs acquired American Remedies. We might see this trend in India also. Some policy changes are also expected in the Drug policy of the GoI. The industry is lobbying with the GoI to deregulate the pricing in this sector. Government is seriously considering removing most of the drugs from the regulated list. This will improve profitability in this sector & with companies emphasizing on R & D, a lot of action can be expected in this sector. Power is one of the most important sectors for the development of infrastructure. It is the key input for industrial & economic development. Power generation & distribution was always the monopoly of state run electricity board. India continues to be a power-starved country, even after all these years of planning & building such a huge power generation capacities. This is primarily because of inefficient operations by these boards, loss of power in transmission & power thefts. The total power generation capacity in the country at the end of 99 was 94000 MW. The Indian power sector was historically highly regulated with no entry for private players. Only after liberalization did the government realized the importance of private sector & allowed the entry of private firms. Since then, some private firms have started projects for power generation. Even the distribution was given to private firms in 5 states. Demand & supply scenario Industry & agriculture are the two biggest consumers of power accounting for just over 60% of the total consumption. The early 90s witnessed a growth of 7% in demand for power & this is expected to increase to 10% in the next 3 years. According to an estimate, India needs an additional 135000 MW of additional generation capacities to meet the growing demand for the nest 15 years. Against this, the total installed generation capacity was 94000 MW at the end of 99. There had been delay in implementation of projects for power generation. Financial Institutions are reluctant to invest in power projects because of high gestation period & historical delays in implementation of projects. Demand still far outstrips the supply. The plant-loading factor, on an average, is very low in India. Some of the industry players have shifted to captive power plants to counter this shortage. Power supply to the agriculture sector is still subsidized in India. Future outlook Such a shortage of power presents huge growth prospects for the sector. The government has already liberalized the entry of private players in this sector. These players are regulated & are permitted to set tariffs in a manner to earn a reasonable return on their investment. There has also been a debate as to whether to privatize the state run electricity boards (SEB) but it met with huge retaliation from general public & employees of these SEBs. The FIs have been asked by the Government to lend to this sector, at least to major & promising projects. SEBs will buy this power. The major problem has been the credibility of these SEBs. So the State & the Central Government has to give guarantees for these SEBs. The Government is also considering privatizing power transmission. This will increase the efficiency & decrease the power loss. But keeping all this in mind, the power sector has a long way to go.
This sector, in India, is the monopoly of public sector, with Puss accounting for more than 85% of the market. Three PUS firms, ONGC, IOU & GAIL are the major players in the sector. The Government subsidizes this sector but it is working to remove these subsidies over a period of time. The pricing in this sector was regulated till 98, since then the government has decided to remove these price controls. The price of petroleum will be fully market determined by the year 2003. The demand reflects the level of economic growth in a country & in India, the elasticity of demand for petroleum & natural gas has been more than 1. This means that if the GDP grows by 1%, then the demand for petroleum & natural gas grows by more than 1%. Imports of oil form a major part of the country’s import bill. The country imported crude oil & natural gas worth more than $6 bln. & this is exclusive of the Imports of the private sector. This clearly speaks about the importance of this sector in Indian economy. Demand & supply scenario Demand far outstrips the supply in India. It has grown around 8% in the last 5 years. Domestic production of oil & gas meets less than 50% of the country’s needs. Rest is imported from the middle – east. Private sector firms are free to import crude but the PUSs have to still route it through the IOU. Production of crude (in million tons)
Against the ever-increasing demand, the supply is relatively short. The prices of crude, as of now, are at their all time high, which has further worsened the demand supply situation. The oil fields that are there in India are aging. The addition to the reserves had been very small. The most recent find by GAIL was way back in 1987. And whatever reserves are presently there, they are replenishing very fast. Future outlook In light of above mentioned demand & supply situation, the prospects for the future looks very bright. The Government has already decided to dismantle the administered price mechanism over a period of 5 years in 98 & to make them fully market determined. This will increase the profitability of players in this sector. The Government has also allowed some private sector players in the country to enter into oil & natural gas exploration. The private firms have already invested amount in excess of $2 bln. in oil & gas exploration projects. A new Exploration policy was announced to provide a level playing field to private sector. The PUSs have to compete with these private sector firms for obtaining exploration licenses on competitive basis. With prices deregulated & entry of private firms in this sector, the future seems to be very promising for this sector. The refining & exploration activity includes discovery of oil & natural gas resources by undertaking geological surveys & exploiting them commercially. The importance of exploration & discovering new sources of oil & natural gas for the economy can’t be overstated. The refining sector is again dominated by the PUSs, which account for nearly 95% of the refining capacity & products marketing in the country. Globally, the refining capacity is around 80 mln. barrels a day with OPEC countries forming a major part of it. Prices of crude oil & gas are closely linked to the policies & capacity utilization of OPEC countries. In India, the Government heavily regulated the refining sector & there was no entry of private firms in this sector till 91. Only the PUSs were allowed in this sector. After liberalization, the sector was partially opened to the private firms. With oil demand continuously increasing & no significant discovery of any refinery, the Government realized that the only solution to this problem was to attract large investments. Therefore, it allowed private firms to enter into the refining sector. As of today, the government has granted 22 licenses to developed the oil fields in the country to the private sector. Companies operating in this sector face a heavy business risk because finding commercially viable sources of crude & gas is very uncertain & it involves huge amount of capital for getting into the sector. A lot of investment has to be made in the beginning without knowing whether a oil field will be discovered or not. Future Outlook The Indian petroleum sector is undergoing a transition from operating under price regulations to a market driven pricing regime. And with Government liberalizing the entry norms for the private firms, the entry of global giants in India is expected. The supply will also improve with the commissioning of the Jamnagar refinery of Reliance pert, the largest grass root refinery of the world. But with not much of explored geographical areas in the country, more private firms can be expected to enter into this sector & definitely the sector will look up in the future. The banking sector is the backbone of any economy. It acts as an intermediary who collects the savings from people who have them & channels them for productive uses. Banks have always played a major role in the development of any economy. Banking sector, like any other sector, was traditionally the monopoly of Public Sector Banks. After liberalization, private sector & some foreign banks were allowed to open banking facilities in the country. Since then, the sector has undergone a sea change. The Government deregulated the interest rates in 91 – 92 & with competition increasing, the interest rates started falling. The RBI is dead bent on reducing the interest rates further. The inflation was at its all time lows recently (before the budget). The RBI is reducing CR. & the bank rate almost every year, which has caused the PLO in the economy to fall from 17 – 18% to 11 – 12% today. The banks have been allowed to fix the interest rates, only exception being interest on Savings deposit, which is fixed by the RBI. Then in the late 90s, came the concept of universal banking. The banks are now trying to convert themselves into a one-stop financial service shop. One more trend that is coming up in this sector is the acceptance of technology by the banks, especially private sector banks. Gone are the days of Tele banking. Now the banks are offering Internet banking where one can access his account on Internet, check its balance & can also make transactions. The total demand & time liabilities of the banking sector were Rs. 8735 bln. & the investment & the credit deposit ratio were 88%. The spread has declined during 1998. The most daunting factor however continues to be the non-performing assets (Naps) of the banking sector standing in excess of Rs. 50000 crones as of today. These naps are adversely effecting the bottomless of banks. Future Outlook The banking sector has already undergone a sea change from being a regulated one to a market driven one & a lot of private & foreign banks have entered in the sector. This has already triggered a merger weave in the sector & more are expected to occur. The recent acquisition of Times Bank by HDFC Bank is a case in point. With so many small banks still there, a lot of consolidation can still be expected in the sector. The motive is to grab more market share. Technology is going to play a major role in the success or failure of a bank in the future because both the consumers & the banks are becoming more & more tech savvy. The RBI is taking hard steps to clean up the balance sheets of PBS from NAPs. With such measures by RBI in background, expected consolidation, deregulation & increasing competition, more heat is expected in this sector. This will cause the small players to move out of the market & few big players will remain in the sector. |