Doing Business in India – Opportunities and Challenges AGENDA General Overview of Business Scenario in India Brief Description of Indian Institute of Science Some Specific Insights into following Industry Sectors A Agriculture B Biotechnology C Clean Energy Clean Technologies D Digital Technologies E Ecology Energy Environment Summing up and Conclusions

AGENDA

General Overview of Business Scenario in India

Brief Description of Indian Institute of Science

Some Specific Insights into following Industry Sectors

A Agriculture

B Biotechnology

C Clean Energy Clean Technologies

D Digital Technologies

E Ecology Energy Environment

Summing up and Conclusions

The India Opportunity

The transformation… Slow rate of growth Bureaucratic Protected and slow Small consumer markets Weak infrastructure One of the world’s fastest growing economies Reasonably proactive Opening up of sectors for investment Promising consumer markets Infrastructure needs improvement Yesterday Today India is the world’s largest democracy

Slow rate of growth

Bureaucratic

Protected and slow

Small consumer markets

Weak infrastructure

One of the world’s fastest growing economies

Reasonably proactive

Opening up of sectors for investment

Promising consumer markets

Infrastructure needs improvement

India today… Has world-class recognition in IT, bio-technology and space Is the largest English speaking nation in the world Has the world’s largest single-location forging facility Has the second largest petrochemical facility in the world Is the lowest cost steel producer in the world Is the largest 2 wheeler manufacturer in the world Is the second largest tractor manufacturer in the world Is the fifth largest commercial vehicle manufacturer in the world Is among six countries that launch satellites and does so even for Germany, Belgium, South Korea, Singapore and EU countries Is one of the few countries that has built its own Supercomputer

Has world-class recognition in IT, bio-technology and space

Is the largest English speaking nation in the world

Has the world’s largest single-location forging facility

Has the second largest petrochemical facility in the world

Is the lowest cost steel producer in the world

Is the largest 2 wheeler manufacturer in the world

Is the second largest tractor manufacturer in the world

Is the fifth largest commercial vehicle manufacturer in the world

Is among six countries that launch satellites and does so even for Germany, Belgium, South Korea, Singapore and EU countries

Is one of the few countries that has built its own Supercomputer

Strong fundamentals Indian economy in a resilient mode in terms of GDP growth… Growth Oriented GDP (%) 1 Source: Indiastat.com Increasing International Trade 3 Increasing share of services in GDP 2 Strong Forex Reserves 4 Source: Central Statistical Organisation … along with rising forex rate and reserves … and has an increasing share in international trade With Services Sector gaining importance….

… resulting in a transitioning Indian demography Source: The Marketing Whitebook, 2003-04 by Business World 1994-95 1999-00 2005-06 The Classes Rich (Above USD 4,600; INR.2,15,000) Consuming (USD 970 – 4,600; INR. 45,000-2,15000) Climbers USD 470- 970; INR.22,000 – 45,000) Aspirants (USD 470 - 347; INR.16,000 – 22,000) Destitutes (Less than USD 470; INR.16,000) 24 MILLION households 32 MILLION households 3 MILLION households 6 MILLION households 1 MILLION households 48 MILLION households 32 MILLION households 33 MILLION households 29 MILLION households 66 MILLION Households 75 MILLION Households 66 MILLION Households 78 MILLION Households 48 MILLION households 17 MILLION households

Four sectors underline the Indian growth story Information Technology Auto-components Pharmaceuticals Textiles Major hub for outsourcing IT-based business processes Driven by cost effectiveness India’s wealth of man power Rapid integration with global industry Foreign manufacturers seek to cut costs India has high engineering levels and established productions plants Entering a paradigm shift with new product patent regime Availability of highly skilled scientists Removal of quotas will unleash significant potential Advantages include availability of raw materials and low-cost production

Major hub for outsourcing IT-based business processes

Driven by cost effectiveness

India’s wealth of man power

Rapid integration with global industry

Foreign manufacturers seek to cut costs

India has high engineering levels and established productions plants

Entering a paradigm shift with new product patent regime

Availability of highly skilled scientists

Removal of quotas will unleash significant potential

Advantages include availability of raw materials and low-cost production

Today India is well-positioned as an offshore processing destination Source: NASSCOM – McKinsey 2002 Location Attractiveness Time zone Geopolitical factors Infrastructure High High Low Low China India UK Mexico Philippines Ireland Australia Singapore Note: Size of circle indicates resource availability People Strength Skill availability Language(s) Cost advantage

Location Attractiveness

Time zone

Geopolitical factors

Infrastructure

People Strength

Skill availability

Language(s)

Cost advantage

Faster turnaround using time zone differences (US 10-12 hrs, Europe 4-6 hrs) Ability to implement a 24X7 service model 10% - 15% productivity improvements Lower error rate, quicker turnaround Greater quality visibility Large proportion of SEI-CMM, COPC, ISO9001 certified service providers and 6-sigma practitioners Wide scope of functions - low to high value skills Offshore opportunities span entire value chain across industries Large, qualified and young workforce Easy availability of skills 14 million graduates, 1 million technical resources 40% - 50% net cost savings on labour and skills intensive activities and processes Additional benefits through low cost process improvement, consolidation and automation Companies enter for cost, but stay and expand for quality and enhanced competitiveness India’s value proposition: Cost-effectiveness and high quality Time Scale Cost Scope Quality & Productivity

Faster turnaround using time zone differences (US 10-12 hrs, Europe 4-6 hrs)

Ability to implement a 24X7 service model

10% - 15% productivity improvements

Lower error rate, quicker turnaround

Greater quality visibility

Large proportion of SEI-CMM, COPC, ISO9001 certified service providers and 6-sigma practitioners

Wide scope of functions - low to high value skills

Offshore opportunities span entire value chain across industries

Large, qualified and young workforce

Easy availability of skills

14 million graduates, 1 million technical resources

40% - 50% net cost savings on labour and skills intensive activities and processes

Additional benefits through low cost process improvement, consolidation and automation

The India Challenge

India GDP: USD 3,319 bn Area: 3,287,590 sq km Population: 1,080,264,388 Languages: 18 Per Capita Income: USD 3072 European Union GDP: USD 11,650 bn Area: 3,976,372 Population: 456,953,258 Languages: 20 Per Capita Income: USD 25,494 Companies attracted to India must do more than merely transplant strategies… India is approximately 82% the size of the EU Its population is more than double that of the EU Almost the same number of languages (India has several dialects as well) India and the EU have large variations in demographics vis-à-vis paying capacity … given India’s regional diversities of continental magnitude and interstate variation

India is approximately 82% the size of the EU

Its population is more than double that of the EU

Almost the same number of languages (India has several dialects as well)

India and the EU have large variations in demographics vis-à-vis paying capacity

Challenges companies face in India Infrastructure and environment Complex business environment Poor physical infrastructure (roads, ports, airports) Weak rural infrastructure Bureaucracy High cost of and unreliable power Low urban penetration levels High cost of entry / exit Regulatory / Governance Regulatory changes impacted by coalition politics Restrictive labor laws, e.g. exit options Laborious and time-consuming process to start a business Slow legal process Politicization of investment decisions Market-related Under-developed consumer markets Low penetration levels due to low urbanization Widely varying consumer tastes across regions High price / value sensitivity

Complex business environment

Poor physical infrastructure (roads, ports, airports)

Weak rural infrastructure

Bureaucracy

High cost of and unreliable power

Low urban penetration levels

High cost of entry / exit

Regulatory changes impacted by coalition politics

Restrictive labor laws, e.g. exit options

Laborious and time-consuming process to start a business

Slow legal process

Politicization of investment decisions

Under-developed consumer markets

Low penetration levels due to low urbanization

Widely varying consumer tastes across regions

High price / value sensitivity

Navigating through tangles of bureaucracy in business and procedures Days taken to start business Level of complexity According to Transparency International’s ’04 Corruption Perception Index India’s score is 2.8 out of 10. India ranks 90 out of 145 on the Transparency International Corruption Perceptions. Coalition politics have impacted the pace of reforms FDI allowed in almost all sectors Import duties rationalised Single window clearance Expediting clearances through escalatory mechanisms Greater transparency brought about through e-governance A change is taking place in the regulatory environment…

FDI allowed in almost all sectors

Import duties rationalised

Single window clearance

Expediting clearances through escalatory mechanisms

Greater transparency brought about through e-governance

Note: Rigidity of Employment Index is an average of the following three indices – how difficult it is to hire a new worker, how rigid the regulations are on working hours, and how difficult it is to dismiss a redundant worker. Values are assigned between 0 and 100. Higher values represent more rigid regulations. Labour regulation is a disincentive to grow businesses, reduces flexibility in operations, and increases exit costs. Business with over 100 workers have to secure the permission of state governments to close businesses or lay off workers Difficult to redeploy workers in reorganisations without unanimous agreement of workers. Downsizing strategies that include large-scale job cuts are difficult and achievable only with local government support Most large manufacturing companies continue to be seriously overstaffed for want of a transparent “hire and fire” policy Terms relating to labour conditions, attendance, flexibility, and days lost through disputes vary hugely from state to state. Rigidity of Employment Index Restrictive labour policies can impact flexibility in business While it is difficult to fire workers in India… Source: Doing Business, The World Bank Relatively easier to hire Flexibility to work longer hours Lower cost of laying-off 80 84.7 79 Firing costs (weeks of wages) 80 36.7 20 Rigidity of Hours Index 44 37.0 33 Difficulty of Hiring Index Germany Regional Avg (Asia) India Indicator

Labour regulation is a disincentive to grow businesses, reduces flexibility in operations, and increases exit costs.

Business with over 100 workers have to secure the permission of state governments to close businesses or lay off workers

Difficult to redeploy workers in reorganisations without unanimous agreement of workers.

Downsizing strategies that include large-scale job cuts are difficult and achievable only with local government support

Most large manufacturing companies continue to be seriously overstaffed for want of a transparent “hire and fire” policy

Terms relating to labour conditions, attendance, flexibility, and days lost through disputes vary hugely from state to state.

Relatively easier to hire

Flexibility to work longer hours

Lower cost of laying-off

Infrastructure investment has not kept pace with the needs of the economy In 2003, India’s infrastructure spending was just US$35 billion Low spend A meaningful impact on overall growth will require consistent investment of at least US$60-80 bn p.a. Immediate requirement In the past 10 years, government has cut capital expenditure as a percentage of GDP5.6% (in F2004) from 9.3% Low infrastructure development Private investment (domestic and foreign) in infrastructure projects Demographic trends can lift household savings and channel them into infrastructure projects FDI up to 100% in select projects Mega road projects Port sector opened for private participation Introduction of a regulatory authority framework Developing rural distribution networks Public Private Partnerships Improvement on the Infrastructure front…

FDI up to 100% in select projects

Mega road projects

Port sector opened for private participation

Introduction of a regulatory authority framework

Developing rural distribution networks

Public Private Partnerships

The Indian success story has to be objectively viewed from another perspective as well… The Indian privatization process has been very slow Total amount collected in last 14 years was just US$11.9 billion Few companies have transitioned into private hands Weak results from Privatization Estimate of market value of government companies (excluding infrastructure assets) ~ US$150–175 bn Fairly large size of assets Privatization has been mired with controversy of being anti-labour and non-transparent Politicization

The Indian privatization process has been very slow

Total amount collected in last 14 years was just US$11.9 billion

Few companies have transitioned into private hands

Estimate of market value of government companies (excluding infrastructure assets) ~ US$150–175 bn

Privatization has been mired with controversy of being anti-labour and non-transparent

Corporate Governance is gaining acceptance, albeit gradually….. Complex group structures – difficult to unwind, ‘hidden’ owners especially other factions of the family -especially true for promoter owned and managed companies Fiefdoms’ – decision making concentrated ‘ Associated companies’ may need to be consolidated which may bring in more liabilities Minority interests may have a disproportionate amount of power Unwinding the Corporate Veil might be a challenge Related party supplier / customer relationships on non-commercial terms No formal arrangements with related parties Funds deployment in non-core activities Sacrifice of shareholders’ interest for promoter gain Non Arm’s Length Transactions with Related Parties/Group Companies Implementation ranges from academic/ cursory to robust, depending on management philosophy Reliability of internal and external audit report may be questionable Statutory audits by small time auditors run the risk of being an eye wash Spirit behind Implementing Corporate Governance Measures may be Questionable

Aggressive Tax Positions Continue to Find Favour…. Aggressive tax management (tax planning vs. tax avoidance) Tax litigation is common, Final resolution of issues time consuming This could result in cash outflows at the outset and inflows later if company successfully defends: impacts cash flows given lengthy legal process Continued availability of tax benefits/ incentives post transaction (needs careful analysis)

Need to pay attention to the operating environment and to cultural aspects In India ‘everything goes’ Develop an ‘India’ strategy; - Have a long term view - Choose the right Joint Venture partner - Choose the right regional model - Use global best practices - Conceptualise India-specific products Optimally blend expatriate management with local talent Foreign Investors should…

Develop an ‘India’ strategy;

- Have a long term view

- Choose the right Joint Venture partner

- Choose the right regional model

- Use global best practices

- Conceptualise India-specific products

Optimally blend expatriate management with local talent

Source: KPMG research Faster implementation of reforms needed Redefinition of roles of public and private sectors. Urgency to revamp infrastructure Sun-rise industries establishing themselves internationally. Reforms consistently moving in the same direction. Indian manufacturing sector becoming globally competitive Investment opportunities driven by: Existence and growth of markets Availability of resources and global competitiveness In conclusion… … India today offers an early mover advantage