INDIAN ECONOMY - All Izz Well

Comparison Between India and China Economies

If the start of the year 2009 was marked by extreme risk aversion amongst the investors and entrepreneurs, the start of the year 2010 is being celebrated by return of risk appetite and normalization of risk aversion. After witnessing a one of the worst financial and credit crisis on record in the year 2008, the year 2009 was the year of governments and central bankers coordinated efforts through fiscal spending and monetary policies to revive world economy. And it seems that they have succeeded so far in their efforts. However the new growth path of the world economy will be different. US consumer – a de facto driver of world economy in last decade is unlikely to stretch further under the compulsion of financial deleveraging. A lot depends on Asia’s consumption and investment. And when it comes to Asia, comparison of growth profile of India and China is inevitable.

China’s growth in last decade was magnificent at around 10% in real terms and it is on the verge of overtaking Japan as world’s second largest economy. It has successfully created world class infrastructure and has been able to create world class factories to feed world consumption in many areas. Compare to that India’s real growth around 7% in last decade seems rather slow and infrastructure development in India is indeed poor compare to China’s infrastructure development. However in last decade, India has successfully emerged as best outsourcing destination for IT and ITES. Though China’s growth seems much stronger compare to India on surface, study of growth profile of both the countries reveals that India’s growth is much more sustainable and real in “New Normal” world economy.

Some of the positive facts about Indian economy are:

• In many respects India’ economy seems to be the natural development of a market place under the burden of bureaucracy, and incremental but slow moving changes in policies & regulations; but boosted by pent up demand, demographic profile and entrepreneurial energy existing at grass root levels. Whereas, unlike India, China is a command economy working on top-down approach.
  
• China’s growth profile is more skewed towards growth in exports and growth in investment unlike India’s growth profile which is more balanced between domestic consumption, investment and exports. In China’s case, undervalued currency and global credit boom during 2002-2007 has pushed its current account surplus to record level of 10% of GDP in 2007 meaning China has to export 10% of its output to balance its domestic demand and supply. A downturn in growth of external demand has affected its economy heavily in 2008-09 with large amount of spare capacity across many industries. On other hand, India runs current account deficit meaning its growth is domestic demand driven. Though financing a large current account deficit (as in 2008 for India) can be a cause of concern, a moderate current account deficit can be easily financed through remittance from Indians working abroad and FDI.
  
• Gross Fixed Capital Formation (GFCF) is also a cause of concerned for China. Recently GFCF to GDP has reached 50% level unseen by any other developed economy in there respecting development stage. This is because of China’s response to recent economic crisis by effecting biggest lending surge in its history (whereas in India, banks have slowed down on loan growth to remain prudent on quality of loans). Year on year, marginal return on investment in China is falling and it shows speculative nature of China’s capital spending boom in manufacturing, infrastructure and real estate sectors. Though investment in infrastructure can be sustainable or even grow due to its massive population; for manufacturing and real estate sectors, investment boom seems unsustainable. In this scenario, China might enter a phase of permanently reduced overall capital spending activity whereby consumption growth will become an upper boundary of growth. Compare that to India where GFCF is around 35% of GDP and infrastructure spends to GDP is around 4-5% (compare to 16% in China). India’s underdeveloped infrastructure is indeed a big opportunity for virtuous cycle of capital spending/absorption and savings. India’s GFCF seems more sustainable due to its high domestic consumption at around 65% of its GDP compare to China where domestic consumption is only about 40% of its GDP. In India, it is consumer demand that is driving investments and product development to fulfill latent Indian market and these investments in turn drive economic growth, employment and incomes. It is a virtuous cycle.
• The sustainability or otherwise of economic growth rate depends on pool of real savings and price signals sent to agents who use the capital. In China, availability capital is de facto controlled by the government and capital being effectively free with real interest rate running negative for some time, there is an encouragement to invest well beyond common sense resulting in misallocation of capital and creation of excess capacities. In India, story is different. India scores well on capital pricing environment and role of private sector in investment is important in India. India’s high fiscal deficit means the cost of capital will stay high. It may be negative in some senses but then those entrepreneurs seeking capital undertake only high return quality investments. In nutshell, those who are looking for return on investment, the growth in India is more remunerative than that of China.
• India has underinvested in its infrastructure in last decade. However, with return of risk appetite elsewhere in the world bodes well for India’s infrastructure development in next decade as most of the infrastructure sectors are now to open to private sector participation and private entrepreneurs have embarked huge investment in infrastructure sector. These projects can be easily funded by foreign capital (in addition to domestic savings) in search of quality and remunerative returns.
• India’s response to economic crisis of 2008 was more skewed towards fiscal measures. It is fair to say that India’s fiscal stimulus has been somewhat more successful than in many other countries. A fiscal stimulus was already underway through revised pay of government employees and rural employment guarantee schemes even before crisis became full blown. Additional stimulus through tax cuts was also demand positive. During the process, India has successfully galvanized the demand potential of its rural area. Though current level of agro commodities inflation is alarming, a mild inflation of agro products coupled with increase in government’s support prices of some agro products has actually helped rural economy due to some wealth transfer from urban to rural economy.
• One of the most exhilarating prospects for the overseas investors is India’s demographic profile. Demographic dividend that India is set to reach in next decade or two – working age population to reach almost 70% of total population by 2040 – is mouth watering as long as its policies remain market friendly. No investor can ignore the prospects of returns from youthful India.

Despite many advantages, India’s economic structure has some its own Achilles’ heel. India’s fiscal position is one of them. Total government debt (central plus state) is widely quoted at over 80% of GDP. However, against this Indian Government owns many assets, from energy resources to telecommunications licenses to power generation, distribution and transmission and roads, ports and airports. A major disinvestment program can reduce government’s fiscal strain. Only relief in India’s fiscal deficit is that the most of the government debt is held domestically and can be financed through domestic savings. And when India’s economic growth in real term is in structural uptrend along with mild inflation over longer run, current fiscal position seems tolerable to investors provided governments is determined to control fiscal deficits.

Long term food and energy security is another area where India need long term solutions to satisfy demand from its growing population, rising income level, propensity to consume due to rising aspirations and low living standards compare to developed world. However, it is rightly said that a necessity is the mother of invention. New gas discoveries on India’s eastern coast side and many more such potential area still left unexplored can solve India’s energy need partially. India has potential to become a gas based economy over a long run. Nuclear energy is another area where a lot of progress is possible in India. As far as food security is concern, due to limited availability of arable land, productivity improvement is the only way India can achieve self sufficiency in food demand. Nevertheless, even if India (along with China) is not self sufficient in food requirement, once it becomes a “Developed Economy” (say after couple of decades), then developing economies like Africa, which has sufficient resources to feed world’s food demand, can be a outsourcing destination for our food demand making a win-win situation for both India (along with China) and Africa.

India’s strengths like domestic consumption driven economy, potential to grow domestic consumption multi fold in coming decades (on back of India’s demographic profile, rising income, rising aspirations against the backdrop of low living standards, and more inclusive growth with rural economy becoming a significant driving force), investment cycle supported by growing domestic consumption and huge infrastructure development potential, entrepreneurial energy of private sector, sophisticated financial system and above all a truly democratic society makes India’s case much stronger than China when it comes to long term investment. When it comes to India, put your hand on your heart and say “All izz well”.

by,

Manish Marwah

http://www.sapphireconsultinggroup.in/economy_countries_manish.html

Manish Marwah - Advisor and Management Consultant

Appreciation of Rupee - A Boon or Bane

Millon dollar question- one of the most popular saying, might change in future to million rupees question if this present era of rupee appreciation continued to be on roll.

Indian economy is among the fastest growing economies of the world. The appreciation of rupee against dollar will prove out to be another huge addition to its economic prosperity and growth story. However the economic epidemics like poverty, unemployment etc cannot be dealt in short run.
From 2003-08 Indian market is booming in leaps and bounds, today after china India is 2nd fastest growing economy of the world with registering a growth rate of 9%. India is a trillion dollar economy and has become world’s 12th largest economy (2008 estimate). Now major question drifting in every Indian mind is “Rupee Appreciation”. The rupee appreciated by 9.8% against the US dollar during the previous financial year between April 3 , 2007 to January 16 2008.

The rupee appreciation against US dollar over the past 12 months on year to year basis (December 2006 – December 2007) was a higher 13.2 %. The appreciation of rupee against other major currencies was much less than against the US dollar.
India witnessed 2nd highest appreciation in its currency of 8.35% between January and June 2007 after 9.28 % of Brazil among the emerging economies that are in direct competition with Indian exporters and find themselves better off due to sharp rise in rupee value, revealed by ASSOCHAM eco pulse study.
After having looked at these figures, the puzzle that floats in our mind, will the appreciation of rupee adversely affect our economic growth or it is an indicator of Indian growing economy?

What Lies Behind This Appreciation

The major reason which draws attention towards this rupee appreciation has been a flood of foreign-exchange inflows, especially US dollars. The surge of capital inflows into India has taken variety of forms ranging from foreign direct investment (FDI) to remittances sent back home by Indian expatriates. The main impact of these flows is as follows:

FDI: India’s starring economic growth has created a large domestic market that offers promising opportunities for foreign companies. Moreover many companies rising competitiveness in many sectors has made it an attractive export base.

ECB (external commercial borrowings): Indian companies have borrowed enormous amounts of money overseas to finance investments and acquisitions at home and abroad. This borrowed money has returned to India, boosting capital inflows. In 2007-08 (april-september) external assistance (net) was placed at US $ 729 million as against US $ 386 million for the corresponding period in 2006-07 indicating a growth of 88.9%.

Foreign portfolio inflows (FII’s): India’s booming stock market embodies the confidence of the investors in the country’s corporate sector. Foreign portfolio inflows have played a key role in fuming this boom. Looking at the period of 2003-04 and 2006-07, the net annual inflow of funds by foreign institutional investors averaged US $ 8.1bn. Trends during first five months of 2007 indicate that this flood is continuing with net FII inflows amounting to US $4.6 bn. Another major source of portfolio capital inflows has been overseas equity issues of Indian companies via global depository receipts (GDR’s) & American depository receipts (ADR’s). Moreover FII’s registered in India has doubled to 1050 between March 2001 –march 2007 and now around 3,336 FII subaccounts also exist. FII equity flow has increased from $9.8 billion in 2004, $ 11 billion in 2005 to over 16 billion in 2007. The stock market has buoyed by strong corporate performance and these inflows have risen to 43% in 2007. However in mid-October RBI banned foreign investment via off shore derivatives called participatory notes (PN). These derivatives were used by foreign investors not registered in India (say hedge funds) to indirectly invest through registered investors. Between Mar 2004 – Aug 2007 the number of FII sub accounts that issued PNs rose from 14 to 34. Many believed that motive behind such RBI measure was to improve transparency of capital inflows and that restricting inflows via PN would have little or no impact on overall inflows coming into the country.

Investment and remittances: Another major source of capital inflows has been non-resident Indians (NRI’s) investing large amounts in special bank accounts. While NRI’s emotional connection to the country of origin is part of explanation to this, the attractive interest rate offered on such deposits also provide a powerful incentive. In 2006-07 NRI deposits amounted to US$ 3.8 bn. another large source of foreign exchange inflows has been remittances from huge number of Indians working overseas temporarily. Such remittances amounted to a colossal of US $ 19.6 bn in April-December 2006, a 15% year on year increase.

Impact on Importers - The Gainers According to an industry analyst: every 10 paisa appreciation in rupee negates one dollar upward movement in international price.
Rupee appreciation brings jovial time for importers. Major imports to India are petroleum products, capital goods, chemical, dyes, plastics, pharmaceuticals, iron and steel, uncut precious stone, fertilizers pulp, paper etc. during the periods when dollar was getting strong against rupee, when 1$ = Rs 48 importers used to pay Rs 4800 for every $100. Since the beginning of the year 2007, rupee has appreciated nearly to about 10%. With value of rupee Rs 39.35 = 1$ for every $100 importer has to pay Rs 3935 by gaining a profit of Rs 865. This gain will bring about savings in cost which can be passed on to consumers, thereby becoming immediate tool for controlling inflation.
Over 10% appreciations in domestic currencies against dollar has thrown a new M&A opportunity for India Inc which wants to reach out world by acquiring going concern on a global scale. An ASSOCHAM study of 70 deals done in the first six months of the last financial year( 2007-08) , in which Indian firms undertook buyouts worth $ 14 billion , has revealed that Indian companies would have saved Rs 6500 crore ($ 1.66 bn) just because of increase in rupee value.
Due to continuous decrease in dollar value, the US had remained the most favorite hunting ground for Indian companies. $2.9 bn valuation deals were announced with US companies in financial year 2007-08.
In terms of sector analysis steel rule the rest owing to the Tata-Corus deal. The overall valuation of M&A in steel sector was of around $5.4 bn.

Rupee appreciation is also welcomed by companies which have overseas borrowings. Significant levels of foreign currency –denominated, especially US denominated loans generate forex gains because of reduce interest payments which are occasioned by rising Indian rupee. Companies like Ranbaxy and L&T have been able to generate forex gains because they have substantial exposure to ECB’s.

Impact on Exporters -The Sufferers

With the ratio of 70:30 of imports and exports the major export destinations of India are USA, EU, Japan, Brazil and other Asian countries. Products which generate revenues from these destinations mainly compose of handicrafts, gems, jewellery, textiles, and ready made garments, chemicals and other related products. As seen for imports, if we analyze if an exporter is getting Rs 3935 now instead of Rs 4800 he is at a loss of Rs 865. This loss will lead to erosion of exporter’s profit margin and will affect their competiveness in global market.

In contradictions to the apprehensions of that there would be shrink in profit margins of exporters due to emergence of strong rupee, the latest studies of ASSOCHAM exhibit that stronger rupee will bring in rich dividends for India Inc and boost its profit margins between 12-15% in long run as exporters are brininging new technologies with cheaper imports for expanding their existing capacities.

The chamber holds that a strong rupee would reduce the cost of imports and would have some positive impact on those exporters which have large import content as witnessed from figures above. It further recommended that if companies are able to expand their capacities in rupee appreciating scenario, they would in the long run , definitely be in win-win situation as demand for Indian exports in developed countries would not slow down. The India Inc would be able to export at very competitive prices as a result of capacity building through technological advancements and increase in margins by 12-15%.
Policy Dilema
Indian policymakers are struck with difficult crisis. On one hand, the stronger rupee has benefited the economy by making imports cheaper. On the other hand due to both economic and political reasons policymakers cannot afford to ignore the problem of exporters. India‘s rapid export growth in recent years have been the major accelerator of economic growth.

If RBI intervenes to stop rupee from appreciation further , it may turned out to be a boon for export oriented units and crate more employment but at the same time this may also bring in inflationary tendency to the market. Therefore government is in dilemma of choosing between inflation and unemployment.
There is a limited extent to which RBI can intervene in the foreign exchange market in the face of large sustained capital inflows; policymakers can stem rupee appreciation substantially by easing limits on domestic firm’s overseas investments or restricting inflows – for instance, through further control on ECB’s. The RBI has already taken tentative steps in this direction making it more difficult for Indian firms to borrow in foreign currency and eliminating the exemption from ECB limits which used be previously enjoyed by real estate firms. ....

By. Manish Marwah

Is Yield Improvement a Real Possibility?

Today it is possible to increase the yield with the combination of new sciences- based on genetically modified seeds and applying existing and traditional sciences – better use of fertilizer and improved irrigation systems. For example, in the US, new seed technologies have reduced diseases vulnerability of crops like maize and cotton. In India also us of BT cotton, a genetically modified version of cotton seed has resulted into very much improved results.

Some regions have apprehensions about the use of genetically modified varieties due to fears of unintended consequences, but most scientists so far have proven no adverse effects, even 10 years after adoption.

India’s crop yields are far below that of many regions. For example, India’s wheat yield at 2600 kg / hector is well below that of china (4100 kg / hector) and Europe (5000 kg / hector). Similarly, India’s rice yield at 3000 kg / hector is again well below that of china (6200 kg / hector), Europe (6400 kg / hector) and US (7500 kg / hector). India’s soybean yield at 870 kg / hector is far below that of Brazil (2500 kg/hector), Europe (2600 kg / hector) and US (2700 kg/hector). So, it is clearly a possibility to significantly improve crop yield in India. Honorable Minister of Agriculture Shri Sharad Pawar has also in his recent speech expressed concern over the slow pace of farm research in the country and exhorted scientists to raise productivity of crops to meet domestic demand and cut import dependence.

Long-term Measures by the Government

To counter the political implications of the poor farm growth and inflation risk, the government has planned or planning some long-term measures. The government has announced that a coordinated approach on agricultural indebtedness will be finalized in the near term to help the farming population and avert a further rural debt crisis in the country. According to the media reports, the government is likely to initiate a mega-farm loan-restructuring package covering bad and doubtful debt of about Rs300 billion (or US$7.5 billion) in the upcoming Union Budget to be announced in February 2008.

In the Union Budget (February 2007), the government increased its budgeted spending on irrigation by 54% and on Bharat Nirman program (covering rural infrastructure) by 38%. In addition, the government is targeting a net disbursement of USD 7.8 billion (0.4% of GDP) in the farm credit by the end of next year. The government is also relaxing regulations for private sector participation in agri value chain and many states have amended agri marketing acts paving way for direct transaction of private sectors with farmers. This coupled with emergence of the organized retailing is likely to be a significant catalyst for India’s farm sector growth.

India’s position in the world agro map

India has the second largest arable land (~ 162 million hectors, out of that ~ 140 million hectors is actually sown) in the world next only to USA and the largest irrigated land base of ~ 55 million hectors in the world. Due to such a large arable land base, India is the second largest producer of rice, wheat, sugarcane (for sugarcane it may be the largest for current year), fruits and vegetables; the largest producer of tea and a leading producer of edible oil seeds and coarse grains in the world. India also has second largest cattle head count and the largest producer of milk in the world. But, India is also a second largest populous country in the world (having population of ~ 1.2 billion people), so on demand-supply front, except edible oil for the most of the major agriculture items, India is largely self-sufficient, though it has started importing wheat to replenish it inventory.

But at present, the key question one should consider is – Is India prepared or capable of meeting all its future demand for food without restoring to imports from the rest of the world (and becoming food dependent country) and without having widespread inflationary effects? It is sure that rising per capital income on back of strong economic growth, exponential growth in middle income consumers, higher aspiration and changing food habits are likely to result into higher non-liner growth (compare to population growth) of food consumption in India. However, as far as the growth is concerned, India’s agricultural economy is stagnant on many (or almost all) fronts. Indeed in the last five years, the average growth in agriculture production has been below country’s population growth. Annual per capita food grain production has declined from 207 kg in 1995 to 186 kg in 2006. The rate of agriculture growth has fallen from 5% in the mid-1980s to less than 2% in the past half-decade.

Net irrigated area has just grown from ~ 50 million hectors in 1990s to ~ 55 million hectors currently , capping the growth in available land for cropping (As irrigation makes it possible to take crop two times a year instead of rain dependent land where only one crop per year is possible). The average growth in land brought under irrigation decelerated to 1.5% during F1991-04 compared with 2.4% in the 1980s and 2.7% during the 1970s. The government spending on agriculture is also hovering around 0.5% of GDP since last couple of years. On productivity front also there is not much growth. The yield per hector of food grains is around 1700 kg / hector, almost stagnant for last seven years. The government's fertilizer policy has distorted the trend in fertilizer consumption and therefore the mix of soil nutrients, resulting in low productivity. The ideal usage ratio of nitrogen, phosphorus and potassium (NPK) is 4:2:1. According to the Planning Commission of India, this is one of the proven and well-documented reasons for stagnation in the productivity and production growth rate since the early 1990s. Another problem in India is fragmented land holdings – about 60% of the farm land is owned by small marginal medium farmers who are unable to benefit from power of scale and are more vulnerable to adverse weather conditions and high level of indebtedness.

Future demand by various estimates of per capital GDP growth suggest that by 2020 India will require 270 to 290 million tons of food grain against current production of ~ 212 million tons. This can only be achieved either through increasing the yield per hector (need to achieve yield of 2100-2150 kg / hector from current 1700 kg/hector) or by increasing area under irrigation (Only 40.3% of the farming land is irrigated). India’s solution to remain food sufficient economy lies in systematic efforts to achieve both.

Worldwide food prices have risen sharply and supplies have dropped this year… The changes represent an “unforeseen and unprecedented” shift in the global food system, threatening billions with hunger and decreased access to food…

United Nations Food and Agriculture Organization on its latest food outlook

Article Author Manish Marwah

Global food inflation is on the rise …

Global wheat, rice, maize and soybean prices have increased to new multiyear highs. The CRB food stuff index has rise 23.7% y-o-y in December 2007. The FAO’s food price index rose by 40% in 2007, on the top of the already 9% increase the year before, and the poorest countries spent 25% more in 2007 on imported food.

The prices of grain-fed meat, eggs and dairy products are also significantly up spurring wide spread inflation throughout the consumer food market.

In India, healthy buffer stock and the government’s efforts to restrict exports have helped in keeping domestic food prices (especially of grains and pulses) insulated so far (In fact, NCDEX agri index is currently quoting marginally down y-o-y). However, with a lag, some amount of pass-through of higher international prices in domestic food prices will be inevitable. In India, domestic demand supply situation is also very tight in certain agro commodities like wheat and edible oil, any adverse impact on output could potentially push up the domestic food inflation sharply (as on January 2008, area under acreage for wheat is down 2-3% y-o-y and for oil seed, it is down ~ 10% y-o-y).

Rising inflation and slow response to rising demand for wheat, pulses, rice and edible oil have caused a sense of urgency for food security in the country…. The rates of growth of agriculture in the last decade have been poor and are a major cause of rural distress… Farming is increasingly becoming an unviable proposition because of the nature of landholdings.”

Honorable Prime minister Dr. Manmohan Singh speaking at 53rd meeting on the National Development Council

Approach In Agriculture

AGRICULTURE, The Next Big Opportunity

Despite India's dominent position as a producer in word agriculture, India has a Meager 1.5% share of global agritrade.This is because both, productivity levels(yields) as well as the level of food processing in India,continues to languish below that of comparable geographies. Thus,the potential for growth in this sectior is huge and could in turn trigger growth of the intire economy, driving GDP growth. Recognizing this potential, the government has decided to step up investments in this sector, open it up to the private sector by premitting contract farming which should see the growth rate of the agricultural sector more than double over the next few years helping India achieve a GDP growth of 8%.

India occupies a dominant position in world agriculture. In India, 52% of total land is cultivable as against 11% which is the world average. Also, of the 60 soil types in the world, India has nearly 46. India thus has the second largest gross cropped area (160 mn hectares) and is a leading producer of cereal crops, pulses, tea, jute and allied fibres and fruits & vegetables. It also has the second largest livestock population in the world and is the largest producer of milk in the world. In fact, India accounts for 17% of the animals, 12% of the plants (including over 10,000 species of aromatic and medicinal plants) and 10% of fish genetic resources of the world.


But India's share in international food trade is negligible. India accounts for less than 1.5% of international food trade. There are several reasons for this. Firstly, the agricultural sector is largely unorganized, dominated by small farms (in all 100 million, with farm size of less than 1.2 hectares divided into 3-10 separate plots), which constrains productivity levels or yield per hectare. Secondly, very little of the food that is produced is processed thanks to the food processing industry also being largely unorganized. Small players, which process less than 0.5 tons/day and aggregating around 9,000 units, account for bulk (~75%) of processed food output.


Thirdly, the value of wastages in food grains and fruits & vegetables is estimated at over Rs50,000 crore, as the food chain from the farmer to the consumer involves several intermediaries with multiple-point handling and long transit periods. And this in turn increases the cost differential between the mandi (wholesale) price and the market price to 60-100% or more. Fourthly, with government funding to the sector proving grossly inadequate and liberalization withheld, capital formation saw a negative growth.

These shortcomings constrained the growth of the agricultural sector, which has seen a deceleration from 3% in the 1980s to just 2% over the last 10 years, even while its counterpart the services sector grew at a rate of over 7.5%. Considering that agriculture accounts for 35% of India's GDP and nearly 65% of employment, even if the growth rate in agriculture were to double, it could spur growth in GDP to over 8%, both directly through increase in agricultural production as well as indirectly though growth in rural consumption.



India's gross cropped area of 160 mn hectares nearly equals the size of US farmland and is larger than that of Europe and China. But with only ~40% this land being irrigated, agriculture production has grown at a rate of just 2.7% per year over the last 40 years. It israte of just 2.7% per year over the last 40 years. It is estimated that a 1% increase in irrigated area generates a 1.6% increase in crop output and a RoI of 17%. Realizing this, the Indian government has been making a concerted effort to increase gross cropped area under irrigation including offering irrigation projects on BOT basis. It is also opening up the sector by allowing corporates to undertake (i) Contract Farming, (ii) Supply Chain Management, (iii) Agro Retailing and (iv) Food Processing on a larger scale.
To facilitate the same the government has asked states to change their APMC Act (which required all agricultural products to be sold only in government regulated markets) and linked credit flow to the same capital investment subsidy for renovation of godowns and setting up farm marketing infrastructure will only be given to states that have amended the APMC Act. Fourteen states and four Union Territories have already amended the APMC Act which allows farmers to sell their produce directly to buyers. Meanwhile, another six states have undertaken partial reforms and 13 states along with three Union Territories have initiated action on the reforms front.

Contract Farming

Despite India's leading position in world production, it lags behind in productivity (yields). In fact, though India ranks second in rice and wheat production, in terms of yield/hectare it ranks 52 (rice) and 38 (wheat). For pulses the productivity levels drop even further. Despite being the highest producer of pulses in the world, India ranks 138 in terms of productivity. To improve yields in agriculture, the government has allowed the private sector to undertake contract farming. This, the government believes will result in increase in seed replacement (from 12% to 20%), farm mechanization (from 25% to 40%), fertilizer (NPK) use (from 91.5 kg/ha to 160 kg/ha) and IPM coverage (from 5% to 15%) apart from improving cropping intensity from 134% to 145%. According to the Agricultural Ministry, reforms in the agricultural sector are likely to see total food grain production rise from 203.41m ton in 2000-01 to 320.0m ton by 2011- 12, registering an annual growth of over 4%, while for horticultural produce the growth would be even higher from 152.5m ton in 2000-01 to 300m ton in 2011-12, a growth of over 6% p.a.

Allowing corporates to undertake contract farming has seen the entry of large players like PepsiCo India Holdings, Bharti TeleVentures, HLL (which works in consortium with Rallis which provides agri-inputs and know how and ICICI which gives farm credit), Tata, DCM Shriram and McDonald's among others. In the case of PepsiCo, which has 75,000 acre of holdings across states on which nearly 200 farmers grow corn, tomatoes, basmati and potatoes, contract farming led to savings of 20-30% apart from ensuring steady and adequate supply of raw material for its food processing plants. In fact, PepsiCo's foray into contract farming in Punjab was on account of inadequate supply the company required 40,000 ton of tomatoes over 55 days to operate its tomato processing plant but the state could provide only 28,000 tons in one season (28 days).

However, the total area currently under contract farming covers only 7 million acres of the total cultivable land of 400 million acres, accounting for less than 2%. And even this figure drops to 200,000 acres if only corporate contracts are considered. While contract farming is attracting more players like Reliance Industries, retail chains like Big Bazzar and Metro, the challenge will be to integrate farmers as benefits of scale and technology can be achieved only on minimum 3-4 acre plots.

Supply chain management: key to profit maximization

The long supply chain starting from harvesting, packing, grading, transportation, storage, wholesale and finally retail sale involves very little value addition but huge losses in terms of wastage (15-25% is lost by the time the produce reaches the retail level). In value terms, the wastage in food grains (including post harvest losses) is estimated at over Rs50,000 crore a year. For fruits and vegetables (where post harvest loss is higher at 25-30%) it is estimated at over Rs 23,000 crores.

Further, despite little or no value addition, the price of the commodity increases by nearly 100% from the farm-gate to the retail stage, with neither the farmer nor the consumer benefiting. The share of the rice grower in the final price paid by the consumer is usually not more than 44-47%. And for fruits and vegetables the farm gate price as percentage of retail price is even lower at 25% compared to 70% in USA. According to a study conducted by Rabo India Finance, farmers share could increase to 33% of total revenues on an average after disintermediation in the supply chain, while consumers would save 10% of their spends on food if supply chain efficiencies were improved.

Terminal market complexes: As a step towards reducing wastage and increasing share of producers in price, the government has encouraged corporates to set up TMCs. TMCs offer multiple choice to farmers such as electronic auctioning and direct sale to exporters, processors and retail chains under one roof. In addition wastage is reduced as TMCs provide storage infrastructure (giving participants the choice to trade at a future date), logistics support including transport and cold chain services and cleaning grading and packing support to farmers. The TMCs would operate on a Hub & Spoke format with the TMC (the Hub) linked to a number of collection centers (the Spokes) located at key production centers. Corporates that have expressed interest to set up TMCs include Reliance Industries and ITC, which plan to invest between Rs60 crore to Rs120 crore on each TMC. In all, eight TMCs are likely to be set up in centres like Mumbai, Nasik, Patna, Chandigarh, Rai (Haryana), Bhopal, Nagpur and Kolkata. The area covered would vary from 200 acres (for Mumbai) to 55 acres (Kolkata). And the handling capacity in each TMC would range from 200,000 ton to 600,000 ton (for Mumbai) a year.

Information technology to aid growth

The Agricultural Ministry with the help of the National Informatics Centre has promoted on-lineagricultural markets for crops and horticultural produce.

Agmarknet: To ensure that farmers get a fair price for crops, the Agmarknet has sought to network all major agricultural producer markets, agricultural marketing boards and departments and wholesale markets in the country. Along the same lines it has also promoted Hortnet a horticulture informatics network (though this has been taken up on a turnkey basis with the hub having been set up at the National Horticultural Board, Gurgaon, to which 33 countrywide market centers of the Board areconnected. Prices and arrivals of fruits and vegetables are received by NHB on a daily basis from the 33 centres. To improve productivity at the farm level and help in efficient dissemination of information it has also set up a crops informatics network (Cropsnet), a plant protection network (PPIN) and a fertilizer informatics network (Fertnet).

The success of introducing IT in agricultural marketing can be gauged from the fact that Agmarknet, which has set a target of connecting 2810 market nodes in the 10th plan, has already connected 2408 nodes.

E-choupal: ITC has also made a significant contribution to the growth of e-markets. ITC's echoupal network is today the largest network in the country with over 6,000 kiosks in operation. It has already connected more than 30,000 villages across six states and is growing at a hectic pace, entering 30 new villages a day. In recognition of its contribution to the field of information technology, the company recently received the prestigious Development Gateway Award, an international award recognizing outstanding achievement in the application of information and communication technologies.

Whats Driving Indian Consumerism

India’s baby boomer generation has grown up and unlike their parents who experienced guilt pangs every time they spent money, this generation has no such qualms and believes in living it up. One can attribute this largely to the fact that today’s consuming class has not only grown up in the post liberalization era but also has more choice too, both in terms of job opportunities as well as lifestyle choices.

Better economics (India is the fourth largest economy in terms of Purchasing Power Parity in the world) and the country’s growing eminence as a cheap and par excellence service provider, is seeing to it that global companies flock to India to grab a share of the growing consumer pie. Moreover, as markets in the developed nations are simultaneously getting saturated, India’s 250 million, and growing middle class is a big lure for global behemoths.

India’s ’Demographic’ DanceIndia is just the right age and is currently the youngest nation in the world with 65% of its billion plus population under the 35 years age group. What’s more>, a large percentage of this youth is urban. As a result, India’s urban/total population today stands at around 30% and is tipped to touch 37% by 2016, which is comparable to the urban-total/ population levels in East Asia. Further, the median age for India’s youth is also one of the youngest in the world. As against 35 years in USA, 41 years in Japan and 30 years in China, the median age for India’s youth is roughly 24 years.

According to a study conducted by the Asian Development Bank, the proportion of population in the consuming age (15-54 years) is also likely to increase from 58% in 2006 to over 60% in 2010, while the dependency ratio (share of non-working to working population) is likely to decline from 62% in 2003 to around 55% in 2010. In fact, as a higher percentage of population moves into the consuming class, the growth in consumption expenditure is likely to exceed growth in per capita income (12% y.o.y. for next five years).

Increase in consumption is also a direct fallout of increase in urbanization, as the average per capita urban income is twice the per capita income in rural India (See Table 1.0). Given that the average monthly per capita consumption expenditure for urban India has nearly doubled in the last decade and the fact that urban India accounts for nearly 42% of consumer expenditure (per capita consumption is 90% higher than that of rural India), one can easily attribute the rising consumerism to growth in urbanization.

A stronger rural India with growing capacities to consume is also fueling demand for products and services.Nearly 70% of India’s population lives in villages and rural consumption is directly linked to agricultural income. A supply deficit scenario is driving the firm trend in global cereal prices as stock levels are closed to 20-year low levels. Price trend of other agro commodities are equally or more firm. A combination of firm agro commodity prices, better irrigation and huge government thrust on the agriculture sector has resulted into rising farm income of rural India along with strong return of rural demand. Increased corporate participation and better infrastructure have also resulted in a meaningful impact on farm income and thus rural consumption demand. Increase in income levels: In the last five years there has been a perceptible increase in the number of households in the middle income and higher income categories. Almost simultaneously, the number of households in the lowest-income bracket has witnessed a sharp fall (See Table ). If that was not all, with rising disposable incomes and lifestyles in transition, the spending pattern of the average Indian is also changing. The top three income categories (See Table ) those earning above Rs. 180,000, those earning between Rs135, 000-180,000 and those earning between Rs. 90, 000-Rs. 135,000 will account for nearly 50% of the total income pie by 2010, a sharp increase from 28% in 2002. And as a recent KSA Technopak survey on spending behaviour of more than 10,000 urban households in India indicates, consumers in the last couple of years have started spending more on lifestyle categories like eating out, movies and entertainment (See Table ).

To keep pace with the burgeoning demand of the Indian middle class, over 200 malls are expected to come up over the next three years across the country, while over 50 million sq. ft. of retail space is likely to be added in 2007. The booming organized retail sector is in turn attracting top global brands to India. From clothes to accessories, foods & groceries to jewellery, projects have been lined up that are expected to increase organized retail penetration levels to 10% by 2010. Allowing FDI in telecom has already had a positive effect on the economy: teledensity (earlier below 1% for five decades) went up to 10% in just a single decade. With competition hotting up, tariffs came down and introduction of mobile services saw a sharp increase in mobile subscribers. The recent government initiatives of allowing 100% FDI in real estate development and 51% FDI in single brand outlets has already opened up the sector for many global hopefuls and is likely to have powerful impact on the sectors. And enabling the consumer to spend more and more are the numerous consumer finance schemes that have gained acceptance among the consuming classes. At an individual level, borrowing constraints have reduced substantially with banks/finance companies becoming aggressive lenders. Today, finance is available for almost all kinds of purchases whether large purchases (like a house) or small ones (like a television set). Low interest rates and narrowing down of the gap between deposit and lending rates is also aiding growth in consumerism. The rise in usage patterns of credit cards by the consuming class has also helped to bring a change in spending patterns. In addition, change in other supply dynamics like emergence of multiplexes, resurgence of radio, entry of large corporates in agri space, privatization of airports, increased public private participation in infrastructure projects are also supporting demand driven by domestic consumerism.
Crystal Gazing into the FutureOf course, growing disposable incomes and rising demand will automatically help all sectors of the Indian economy to ultimately ’rise & shine’, but who are the ones on whom immediate impact will be felt? Already the auto industry, consumer durables, telecom and retail banking have benefitted from rising consumerism in India and will continue to be benefitted in the future also. But, organized retail, the entertainment sector and others are now on the verge of boom. Riding the boom in aspirational products, organized retail has been booming. Retail sales which have been growing at an average annual rate of 7% during 1999-2002 are set to grow at an even faster clip of 8.3% annually during 2003-08, which is even higher than the estimated growth in consumer expenditure. Given that organized retail accounts for only 2% of the total retail market as against developed countries where most of the retail trade is conducted through organized retail outlets, there is enormous scope for organized retail to grow. At current growth rates, it is estimated that organized retail will account for 10% of the total retail pie by 2010. Strong growth for lifestyle related aspirational products/services is also predicted with increased ability & willingness to pay and availability of diverse choices (like multiplexes, low cost air, etc) to the consumer. Some of the categories that are likely to witness higher growth rates are multiplexes, organized retailing, restaurants, specialty electronics, branded jewellery and air travel. The Rs 300 billion Indian entertainment industry is also set to double in the next five years with all supply dynamics moving in a unidirectional manner. The growing penetration of C&S and a growing advertiser base in the broadcasting space, emerging platforms like Direct to Home (DTH), IPTV and consolidation of cable operators in the media distribution space, easy access to funds and corporatization of the movie production industry, digitization of cinema and emergence of multiplexes has already spawned a boom in entertainment business. Now, with FDI/FII investment of 26% allowed in the broadcasting, the number of channels have increased from a paltry few to over 200 channels and from limited transmission period of six hours to round-the-clock transmission. FDI/FII investment of 49% in cable services and 20% in DTH ventures should bring about more changes in this space. The FMCG industry estimated at Rs 450 billion is also the next big beneficiary of the boom in consumerism. Thanks to lifestyle changes and globalization, the traditional perception regarding packaged food being either stale or unhygienic is changing. Emergence of modern retail formats and better supply chain management has already made the agri sector an attractive investment opportunity to large conglomerates like Bharti and Reliance, among others. With growing consumerism, FMCG companies, which have finished their capex phase, are now building brands aggressively. Given the consumer’s preference for lifestyle segments - skin care, cosmetics and health care are the sectors to bet on in the FMCG space, while in processed foods - juices, ready-to-eat staples and refined edible oil are the areas likely to generate the highest returns. Last but not the least,the high cost structures and poor infrastructure that retarded the growth of India’s aviation sector in the past, is fast disappearing. Regulatory changes (abolition of IATT and reduction of excise duty on ATF) and competition have helped drive costs down making air travel more affordable. In fact, reduced fares have increased demand from leisure travelers (a segment that is likely to grow at a faster rate than the business traveler segment that dominated air travel until now) and the sector is likely to grow at a rate of 20% for the next five years.
Still not convinced of India’s potential? Check this…
Organized retail USD 35 billion by 2010 and USD 90 billion by 201 Entertainment business Rs 600 billion by 2010
Lifestyle related spending Rs 2500 billion by 2010
Airline traveler more than 50 million by 2010
Consumer space to treble from here by 2015
Need we say more!

Media & Entertainment: The sunrise sector

It’s truly the dawn of a new era of entertainment. For the Indian consumer it is a time of multiple choices as he can choose from a bouquet of over 300 channels on TV, several FM stations on radio and has a choice of 3-5 movies at multiplexes. For the entertainment industry is time to rake in the moolah as the share of consumer spend on entertainment is increasing and to gain mind share advertising companies are increasing spend. And for the government, it means more revenues by way of taxes. Sure the multiple choices come at an extra cost. But with technology having made significant advances and the quality of entertainment having improved, the Indian consumer is not complaining.
The turnover of the Indian entertainment industry is estimated at ~Rs250 bn in FY05 and likely to witness a CAGR of ~20% between FY04-10 to touch Rs606 bn by FY10. The highest growth is likely to be witnessed by Radio (~31% CAGR) followed by Television (~20% CAGR) and Films (19% CAGR). However, it’s the Television sector that would drive growth of the entertainment industry with a 65% share of revenues in 2010. The share of Radio in overall revenues of the entertainment sector in 2010 would be ~2% only. Over the same period (FY04-10), revenues of the Print Media industry would grow from Rs98 bn to Rs195 bn (12% CAGR).
A host of factors are likely to drive growth of the media and entertainment industry. Some of these are general to the entire industry while some are specific to a particular segment within the industry. For instance among the general economic factors, increasing consumer spend on lifestyle related products, especially entertainment, and rising urbanization would see demand for Television, Films as well as Radio go up, while rising literacy rates would translate into higher demand for Print Media. Among the more specific factors, the pace of reforms undertaken by each segment of the industry (for instance, films and television was opened up to private and foreign investment first and radio and print only recently) is meanwhile likely to determine the extent and rate of growth of each segment.
Even a slight increase in media penetration levels in lower economic classes (C, D, E1 and E2) is likely to see demand for media and entertainment, especially Radio and Films, increase substantially in absolute terms as the lower economic classes have a large population base. Whereas an increase in advertising spend (currently 0.34% of GDP which is one of the lowest in the world and lower than the global average of 0.98%) could result in substantial increase in revenues for this industry.
But apart from the economic factors driving demand for Entertainment and Media, the emergence of new distribution channels such as broadband, internet and wireless communication would also contribute significantly to the growth of this industry.
Television: entering a new growth channel The Indian television broadcasting system is one of the most extensive systems in the world providing coverage to over 90% of India's 900 mn people. Television has been the main contributor to the growth of the entertainment industry accounting for a 64% share of entertainment revenues in FY04. However, the growth of the television sector which was over 20% in the 1990s slowed down to less than 15% in the 2000s as the sector attained maturity. Analysts, however, believe that growth is likely to pick up to 20%+ levels over the next five years driven by demographic, technology and policy level changes.
Liberalization drove growth between 1991-2004: With the liberalization of Indian television in the 1990s, the number of channels multiplied from a single television channel in 1991 (Doordarshan), to over 100 by 2001 and over 300 by 2005. By 1998, most of the leading transnational media companies (eg. Star TV, BBC, Discovery, MTV, Sony, CNN, Disney and CNBC) were operating in India through cable and satellite networks.However, most of these transnational companies had to adapt their content for Indian viewers. Star TV, which started operations in India in 1991, realized by 1993 that its US originated programming was reaching only a fraction of Indian viewers and to reach a larger audience, it would have to modify its content. It began by subtitling Hollywood films broadcast on its 24-hour channel in Hindi, followed this by dubbing popular US soaps in Hindi and in 2003 went into exclusive Hindi programming for its flagship channel Star Plus. The move to localize content saw Star TVs reach go up from 0.5 mn households in 1992 to over 19 mn households in 1999. By 2005, Star TV had a viewership of over 22 mn homes (90 mn viewers/week) with 80% of Indian viewers watching at least one Star channel. Following on Star TV’s footsteps, Walt Disney too has switched to dubbed Hindi programming on both its channels while ESPN-Star Sports has a dual Hindi feed.With Indian viewers clearly preferring local content over international, the number of hours of television programming produced in India increased nearly five fold between 1991-96. The TV software segment’s revenues saw a 30%+ annual growth between 1999-2005 to Rs7 bn in 2005. Advertising on television also saw a substantial increase post liberalization, with ad revenues increasing from $5,400mn in 1990 to Rs54.5 bn in 2005. However, Doordarshan’s share in total advertising revenues declined post liberalization with Star TV and Zee Telefilms eating into its share. It is estimated that ~20% of mass brands and ~50% of niche brands moved their advertising from Doordarshan to Star TV post liberalization. By 1993, just two years after liberalization, Star TV and Zee Tele together accounted for ~20% of the total advertising pie.
Demographics and technology to drive growth hereon: At the demographic level, growth over the next five years is likely to be driven by increase in urbanization, higher income levels and changing consumption pattern in favour of lifestyle products which in turn is likely to see penetration levels, especially in rural India, increase. In fact, if recent trends are an indication, rural demand is likely to be a significant driver of television sales. According to a recent report by KPMG (Focus 2010: Dreams to Reality), of the 25 mn households that bought television over the last three years, 19 mn (77%) were rural households. Currently, television reaches only half the population of India ─ 78.9% of urban population and 39.8% of rural population. In all, only 105 mn Indian households of the total 191.96 mn households in India (Census of India 2001) have television, of which only 55 mn households have cable and satellite TV (PWC-Ficci report on the Indian Entertainment industry, 2006). Hence, even though the base is higher than what it was five years ago, the potential for growth of the television sector hereon remains enormous. Apart from demographics, technology is likely to be a key growth driver for television. Introduction of alternate technology platforms like DTH and IP-TV, though currently facing resistance (on the cost-structure and licensing front), is expected to drive the next phase of growth from FY07-10. This is because these systems will not only increase transparency and make revenue share between different distribution segments (broadcasters, multi-system operators and local cable operators) more equitable, but also offer consumers greater addressability through the conditional access system (CAS). Currently, low subscriber declaration by LCOs allows them to corner bulk of subscription revenues (79%), leaving only 17% on the table for the broadcaster and 38% for the MSO. Greater transparency would also reduce disparities in cable subscription charges (which is Rs60/month for 100+ channels in rural and semi-urban areas v/s Rs300/month for the same number of channels in urban areas) that currently have no co-relation with quality or service.
Distribution segment will grow the fastest: An increase in the number of TV homes in Rural India and second TV homes in Urban India along with increase in subscription rates and demand for pay services will drive television revenues over the next five years.The number of TV homes is likely to increase from 102 mn to 128 mn (C&S homes to go up from 50 mn to 90 mn) while average subscription rates are likely to go up from Rs130/month to Rs250/month over FY04-10. Increase in TV homes (number of subscribers) and subscription rates (with C&S homes likely to grow faster than TV homes and a percentage of C&S homes opting for CAS) would in turn result in an increase in subscription revenues from Rs78 bn in 2004 to Rs270 bn in 2010. Subscription revenues would thus see a 26.5% CAGR over 2004-10.Television advertising revenues would meanwhile go up from Rs48 bn in 2004 to Rs106 bn in 2010 witnessing a 14.2% CAGR on the back of growing number of channels while TV software revenues would increase from Rs5.7 bn to Rs16 bn at a CAGR of 18.77% over FY04-10 on the back of rising demand for Indian (Hindi) content both from within India as well as from overseas.
Foreign investment will spur growth: A host of foreign collaborations were announced in the television industry during 2005 covering all areas of operation including broadcasting, distribution and content. Key among them were the Thomson Group’s tie up with VSNL, a Tata group subsidiary, for managing and delivering content for broadcasters and content providers. Meanwhile, regulations forced broadcasters including Walt Disney, ESPN-Star Sports, Star, Discovery to set up foreign investment subsidiary companies for content development and advertisement airtime sales. The distribution space saw the entry of foreign MSOs such as Hathway and Hindujas. And the television content space saw UK-based 3i and Mauritius based Americorp Ventures pick up equity stakes in Nimbus Communication.
Policies need a re-look: In terms of policies, the most significant development was the appointment of the Telecom Regulatory Authority of India (TRAI) in 2004 as a regulator for the television industry (with its scope increased to cover broadcasting and cable services) after the Supreme Court in 1995 held that the government's monopoly over broadcasting was unconstitutional. However, TRAI’s role so far has been restricted to providing recommendations to the government most of which (including those relating to rates for free-to-air and pay television channels) are still pending with the Information and Broadcasting (I&B) ministry. Meanwhile, though FDI has been allowed in various segments of the television industry (100% in software production, 49% in cable networks, 49% in DTH ─ of which strategic FDI is only 20% ─ and 26% in news channels), the cap on foreign investment clubs FDI and FII investment in most cases, which has hindered FDI flows into this sector. Apart from this, issues relating to double taxation of foreign telecasting companies (which earn ad revenues from India) and foreign satellite companies (which charge a satellite usage fee from broadcasters) and absence of cross-media ownership rules are also acting as deterrents to foreign investment.
Radio: the fastest growing segment One of the last sectors in the media & entertainment industry to be opened up to FDI, Radio which was liberalized in 1999-2000, has seen a sharp increase in the number of radio stations since then. Though AM frequencies are still controlled by AIR, opening up of some of the FM frequencies and the relative success of channels that were launched has attracted a huge number of players. Nearly 338 licences for FM channels have been granted so far across 91 cities. And the number is likely to increase with the convergence of technologies, with platforms like satellite and internet addressing different distribution channels through a single delivery chain. For eg: cell phones which double up as FM radios.
Plagued by losses: Radio was the first form of broadcasting to be introduced in India with the first private radio service being introduced in Madras in 1924. Though initially operated by a private entity, it was taken over by the British government when it went bankrupt in 1930 and in 1936 was renamed All India Radio (AIR). In 1947 when India gained independence, Radio continued to be government controlled and operated as a department under the Ministry of Information and Broadcasting.
The last 5-6 years has seen Radio being progressively opened up but even today it continues to be dominated by AIR ─ AIR covers 91% of the country by area and 99% by population. Opening up of FM frequencies in 1999 has seen 21 private FM stations in 14 major cities become operational. But the number of channels operational account for less than 20% of the licences made available (bids were called for 108 FM frequencies in 40 cities for a 10-year period) and are significantly lower than the number of licences issued (~37). This is because the annual licence fee (which had to be paid over and above the licence fee charged at the time of issuing a licence) was significantly higher than the earning capacity of most industry players which along with high manpower costs (as most of the talent was drawn from high-wage industries like television, advertising and FMCG) made operations unviable.Ad revenues earned by Radio channels being one of the lowest in the world ─ ad spend on radio as a share of total ad spend in India is just 2% as against the global average of 8% ─ and highly skewed towards a handful of advertisers (11% of the advertisers accounted for 60% of revenues) could cover only 50% of operating expenses and many channels were forced to shut down.
Potential remains untapped: This, however, does not mean that the FM radio sector should be written off. The sector not only enjoys wide coverage (180 mn sets reach 99% of India’s 1 bn population) but is also one of the most cost effective (advertising on radio costs just 15% of what it does on television). Further, with the median age of India’s population at just 24 years (making it one of the youngest in the world), radio should be a major beneficiary. This is because, younger audiences, especially those below the age of 25 years form bulk of radio listenership worldwide which in India’s case translates into a captive audience of 650 mn. The easy availability of FM radio sets at affordable prices (Rs40-150) and its compatibility with cell phones meanwhile offer radio the highest scope for mass penetration among all sectors of the entertainment industry.
Higher growth rate required: If the growth in licence fees continues at the current rate (15% p.a.), the FM radio sector would have to grow at ~40% p.a., nearly double the rate at which it is currently growing over the next three years. This would imply a higher share of FM ad revenues in the total ad spend pie of the media and entertainment sector. Since the global average is 8% (of total ad spend) for radio and 5-8% for media categories in the growth stage, in the short to medium term (2-3 years), the FM radio industry’s CAGR could be in excess of 60%. This means that over the next 2-3 years the industry has the potential to touch a turnover of Rs9.6 bn. Assuming that in the medium term (~5 years), the industry attains maturity and its ad revenues increase to account for 10% of total M&E ad revenues (globally in the mature phase radio advertising revenues account for 10-12% of total M&E ad revenues) the turnover of the industry could go up to Rs12,000 mn from Rs3,144 mn in FY05, a CAGR of 31% over FY05-10. But given the existing size of the industry (21 stations in 14 cities), achieving this growth will be close to impossible, at least under the existing licencing regime. A CII-KPMG study thus estimates that the industry would have to grow in size from 21 stations in 14 cities to 300 stations in 100 cities. Assuming an investment of Rs40 mn per radio frequency, this would require an additional investment of Rs11 bn according to the study. To achieve break even the minimum growth rate for a radio station would have to be in the region of 40% p.a. over a three-year period.
Policies need to be reviewed: To help the radio industry achieve a turnaround, TRAI has suggested that the current licence fee regime be replaced by an entry fee + revenue sharing one (4% of gross revenues) and existing players be allowed to migrate to the new model. Apart from this, TRAI has also suggested that the foreign investment regime be reviewed and FDI investment in areas like news and current affairs be allowed up to 26%. In addition to this, TRAI has recommended that restrictions on owning multiple stations in the same city by the same player be lifted and licence fees for niche channels be rationalized. However, the government has opposed TRAI’s recommendation to move to the revenue-sharing model claiming that it is difficult to monitor revenues and opposed TRAI’s suggestion to grant multiple licences to the same player in a particular city.
Films: Multiplex screens & digital cinema to drive growth
After being given industry status in 2000, all spheres of the Indian film industry (production and post production, distribution and exhibition) saw an increase in corporatisation. As a result of corporatization, the industry’s turnover which was in the region of Rs60,000 mn in 2000 (Arthur Anderson-FICCI report, 2001) increased to ~Rs 98,600 mn in 2005. As the trend in corporatization continues (2005-06 saw several exhibition and production companies go public), the 20%+ growth witnessed by the industry over the last two years is likely to pick up. Though different segments of the industry would witness different growth rates, the overall industry size is likely to touch ~Rs194,300 mn by 2010 witnessing a CAGR of ~25% in revenues over 2005-10.
#1 in volume but lags in revenues: One of the oldest segments of the Indian entertainment industry, films (motion pictures) were first introduced in India in 1896. Since then, the industry has come a long way. In fact, in terms of number of movies produced (estimated at >1,000/year v/s <500>70% of the admissions in Asia-Pacific) India ranks first in the world. This is because with movie tickets priced at less than US$0.40 (US$6.41 in the US), the country’s 1 bn strong population visits a movie theatre at least once in three months. Despite this however, the industry lags in terms of revenues accounting for just 1% of global film industry revenues.
Box office collections to drive growth: The Indian film industry earns bulk of its revenues from box office collections, which account for a share of 86% in the overall revenue pie (77% domestic box office; 9% overseas collections). Apart from this, the industry earns ~6% of its revenues from the home video segment and 9% from sellingrights to mobile companies, television broadcasters and television distribution companies (MSOs and DTH players). Till now, growth in domestic box office collections have been constrained by low average price of movie tickets (at Rs18-19) and occupancy rates at theatres (~35%). However, since multiplexes came up, both ticket prices (multiplexes charge Rs50-80 per ticket v/s Rs17 charged by single screen theatres) and occupancy rates at theatres (as multiplexes have a better ambiance and other draws) have seen an increase. Though the share of multiplexes in the total number of screens is just 2%, given the growth rate in multiplexes and in view of the aggressive roll out plans announced by film exhibition companies, their share could easily go up to 8% of total screens over the next five years (plans for 400+ additional screens have already been announced by four of the leading players ─ PVR, Shringar, Inox and Essel).
Multiplexes to expand revenue base: As multiplexes charge ~3x what is charged by single screen theatres, their share in value terms (@Rs50/ticket) would increase from ~6% in 2005 to 24% in 2010 (assuming a 5% increase in average ticket price) with number of screens assumed to remain constant on account of low occupancy rates and the possibility of some theatres closing down. A higher share of multiplex screens and upgradation of existing screens into digital cinemas (as the cost of upgrading a theatre to digital format is Rs1 mn only) would result in average ticket prices going up from Rs17 now to Rs31. This along with marginal increase in admissions (by ~200) due to higher occupancy rates could result in domestic box office collections increasing from Rs75,920 mn in 2005E to Rs130,200 mn in 2010E even if the share of domestic collections in the overall pie goes down to 67%, given a higher growth rate by the home video segment which is likely to see its share in the revenue pie go up from 6% in 2005 to 14% by 2010. (See table on pg 44 of FICCI-PWC report).
Organized funding would reduce cost: Since the sector was given industry status in 2000, the number of films that went in for organized sector funding has been on the rise with corporates accounting for ~50% of the films produced. Organized financing has significantly reduced the average financing cost in the sector as well as the risk with banks financing 50-70% of the project budget. However, despite revenues of the industry trending upwards and cost of production trending downwards, earnings would come under pressure as a 60% average entertainment tax (one of the highest in Asia) shaves off a large proportion of theatre ticket receipts.
Music: on a slow track The Indian music industry appears to be following in the footsteps of the global music industry, which has been in recession for nearly four years. While globally the industry is undertaking several cost cutting measures to get back on track and making a slow recovery, in India a reduction in offtake of cassets/CDs on the one hand and stagnant cassette/CD prices on the other have resulted in degrowth.
Moreover, the last few years have also seen remixes and music videos of original soundtracks gain more popularity than the original soundtracks. And, this in turn, has reduced sales of original music companies. Piracy has meanwhile been taking away ~42% of the industry’s revenues. Thus, though the audio-video market has been growing at nearly 300% p.a., the same growth is not reflected in legitimate industry sales. Huge production of CDs / DVDs far in excess of demand for the same has only resulted in increasing the incidence of piracy. Apart from physical piracy, digital piracy (thanks to MP3 technology and PC penetration) is also on the increase with easy availability of free downloads from various sites.
Current revenue mix: Currently the industry derives 92% of its revenues (estimated at Rs7,000 mn in 2005 by PWC) from music sales and the rest from non-physical formats ─ 5% from ringtones and 3% from royalties. Of the 92% that it generates from music sales, nearly 60% comes from film music (40% new movies; 20% old movies). With piracy accounting for 42% of revenues, the music industry industry which has already seen its share in the overall entertainment industry shrink to 3.3% in 2005 could see its share go down even further to 1.2% by 2010. PWC estimates the industry to grow at 1.7% CAGR over FY04-10 and touch a turnover of Rs7,400 mn by FY10.
Innovative service offerings could help increase revenues: While the Indian industry has been focusing on curbing piracy by enforcing checks (~Rs40 mn is spent by 50 music companies towards this) and lobbying for legal changes (amendment of the Civil Procedure Code and introduction of the Optical Disc Law), the US industry is turning to innovative service offerings to increase revenues. For instance, Apple Computers, which launched a music store called iTunes, sells individual song downloads for 99 cents and has sold over 200 mn songs to date from its 1 mn song collection. Audio books, exclusive tracks, customized playlists /on-demand videos, internet accounts (that can be accessed from anywhere), monthly subscriptions or pay-per-song facility etc offered by service providers in the US have helped the music industry generate higher revenues.
Conclusion While the entertainment industry itself is likely to see its revenues go up from Rs209,300 mn to Rs605,700 mn over FY04-10, the traction witnessed by various segments of the industry would in turn drive revenues of several sub-sectors. For instance, increase in TV penetration and migration to digital format would see sales of the TV hardware & equipment (HDTV, set top boxes) sector increase. While demand for Indian content and outsourcing would see demand for industries, such as animation, increase. The growth in films would meanwhile go hand-in-hand with the growth in multiplexes (exhibition companies).
The entertainment industry would meanwhile be driven by Integration and Convergence. While integration would increase once cross-media-ownership regulations are in place, convergence with its ability to collapse previously distinct media distribution channels (broadcast/cable television, radio, print and online) into a single delivery chain has already started defining industry trends. Increased standardization of networks and devices to use the internet protocol and rising broadband penetration has seen an increase in convergence and while convergence has helped some industry segments see an increase in growth rates, some like music have seen revenues decrease.
Article Author: Manish Marwah

Sugar-Can it help to somewhat relieve India

India spends close to $30 bn yearly in importing crude oil, which amounts roughly to 30 percent of its total annual imports. With crude prices having doubled over the past two years and presently hovering at around $70 per barrel, a sustained rally could lead to higher inflation and a possible slowdown in industrial growth across most sectors of the Indian economy. Presently crude oil prices are at an all time high, whereas raw sugar is close to 40 percent of its all time high. Ethanol, which is produced from sugarcane is much cheaper than most petroleum products and can easily be mixed with petrol as a fuel in automobiles & other industrial applications. Back during the last oil crisis in the 1970’s Brazil introduced a program to use ethanol in automobiles to decrease crude oil imports. At present 100 percent ethanol is used in roughly 40 percent of the cars in Brazil, with the remaining using ethanol blended with gasoline.
Apart from ethanol, another by-product of sugarcane called bagasse can be used for generating power and at present close to 700 MW of power is produced by Indian sugar mills, whereas the industry potential is approximately 3500 MW. In this era of spiraling crude prices and deficient power generation capacity, India should sincerely consider sugar as an alternative energy source to meet its long term GDP growth target of above 8 percent.
By using ethanol in India’s petroleum industry, a stable and alternate source of raw material can be ensured unlike crude oil whose price fluctuates by atleast 10-15 percent on a monthly basis. The Indian Government has mandated the sale of 5 percent ethanol blended with petrol in 9 states and 4 union territories and in June 2005 the sugar mills coming under the Indian Sugar Mills Association (ISMA) agreed to supply ethanol at Rs18.75 per litre to oil companies. This ‘Gasohol Program’ of mixing 5 percent ethanol in petrol would lessen the impact of spiraling crude prices once the blending percentage is increased beyond 10 percent in coming years. In Brazil about 20-25 percent ethanol is blended with gasoline and the government plans to increase this percentage going ahead.
Where producing a barrel of ethanol costs $32 v/s current crude prices that trade in a $60-70 price band, it seems higher ethanol demand is here to stay and be a future driver for sugar prices. The benefits of using ethanol as a fuel is being recognized worldwide and one can expect to see a significant diversion of sugarcane from sugar to ethanol production. Sugar is primarily a cyclical commodity and when prices drop the sugar mill’s bottomline is directly impacted. To have de-risked revenue streams and to move away from this cyclical nature larger Indian sugar mills such as Balrampur Chinni, Bajaj Hindustan etc are rapidly building ethanol capacities for supplying to petroleum companies. The State Governments of major sugar producing states and the delegates of sugar industry have confirmed the availability of ethanol capacity. Worldwide at present there is about 37 billion litres of ethanol production capacity whereas the demand is only close to 28 billion litres, resulting in surplus global capacity, which is the main reason why ethanol prices have not moved up in line with crude oil. As the demand-supply scenario reverses in the coming years due to increased demand for cheaper and environment friendly fuels such as ethanol, sugar and crude prices would then move in sync with each other.
Cleaner fuelEthanol can be used as an automobile fuel by itself and can also be mixed with gasoline to give ‘gasohol’, the blending percent of which may vary from 10 to 85 percent. To reduce global warming issues, the quantity of carbon dioxide produced while burning fossil fuels such as petroleum has to be minimized. From an environmental perspective ethanol has many advantages - ethanol has 35 percent oxygen that enables the fuel to get completely burned in the engine leading to fewer emissions and is also considered as a renewable fuel. Ethanol also reduces particulate emissions that cause health disorders. Strict emission standards prescribed under the Kyoto protocol is leading to more demand for biofuels such as ethanol blended gasoline and ethanol blended diesel to further lower emission levels. Many nations worldwide have already initiated different programs such as subsidies on capital expenditure for biofuel plants, tax concessions etc, which is likely to result in greater demand for environment friendly fuels over the next 10 years. It is found that starches extracted from wheat, corn, potatoes and some other plants can also be used to produce ethanol by a process called fermentation. Nevertheless on a commercial platform ethanol production from sugarcane is the most successful instance.
Countries such as Brazil and Sweden are using large amounts of ethanol as a fuel, whereas other countries are providing incentives to build up ethanol capacity and use. In France unlike from sugarcane, ethanol is produced from grapes that are of poor quality for wine production. Due to rising crude prices Sweden began using ethanol in chemical production for many years and has been able to cut its crude oil consumption by 50 percent since 1980.
Of all the nations Brazil is the most successful and has learned how to arbitrage cleverly between sugar and crude oil. Before its rise to be the king of the sugar market, Brazil grew sugar mainly for domestic consumption but the previous oil crisis of the 1970’s forced Brazil to divert almost 33 percent of its sugar into ethanol. During the 1980’s however crude prices came off their highs, also there was a bear market in sugar simultaneously and the Brazilian drivers found no incentive to purchase gasohol, which was priced closely to gasoline. But the inevitable happened in 2004 when crude prices kept hitting all time highs. Brazil’s choice was quite clear and with gasohol prices about 35 percent cheaper than gasoline the Government increased the levels of ethanol to be blended with gasoline. At present majority of cars manufactured in Brazil by Fiat, Volkswagen and General Motors run on gasohol. In fact most of these cars have flexi fuel engines, which can run on different blends of ethanol missed with gasoline and is one of the key drivers for more sugarcane going into ethanol production. With excess ethanol capacity in Brazil it exports to the US, South Korea, Japan, Sweden etc – the future of sugar undoubtedly belongs to Brazil.
Need of the hour policiesBlending of 5 percent ethanol with petrol is allowed in the specifications of Bureau of Indian standards for petrol. Initially to help the farmers in the agriculture sector and to bring down pollution levels the Indian Government had launched two ethanol projects in Maharashtra and one in Uttar Pradesh during 2001. These projects supplied 5 percent ethanol blended with petrol through retail outlets, also many R&D studies were carried out to check the financial and operational feasibility of ethanol. The projects and R&D studies were successful, which established usage of 5 percent ethanol blends with petrol. The Society for Indian Automobile Manufacturers (SIAM) has already accepted the use of 5 percent ethanol mixed with petrol in vehicles. The Government has mandated the sale of 5 percent ethanol blended with petrol in 9 states and 4 union territories. This program was supposed to be implemented 3 years back but came to a halt due to unavailability of sugarcane and the inability to arrive at a consensus pricing for ethanol between the sugar mills and petroleum companies. In June 2005 however the sugar mills agreed to supply ethanol to the oil companies at Rs18.75 per litre. With the government intending to increase the blending proportion to 10 percent, the potential for sugar mills to supply ethanol is huge. Apart from India, the EU and Japan have initiated ethanol blending programs upto 5 percent, whereas China, Thailand, SouthAfrica are adopting upto 10 percent blending initiatives and Brazil, USA, Canada, Sweden are pursuing above 10 percent mixing programs.
Sugar Control Order 1966, Sugarcane Control Order 1966 and Levy Sugar Supply Order 1979 govern the Indian sugar industry with powers to regulate very critical activities such as sugar production, movement of sugar, allocation to public distribution system and setting the statutory minimum price (SMP) payable to farmers for sourcing sugarcane. Nevertheless the sugar mills are allowed to sell 90 percent of their production in the free market, but the catch here is sugar production is Government controlled thereby indirectly keeping a check on prices. While cane prices nearly doubled over the past decade, sugar prices increased only by 6 percent, the reason being Government steadily increased the SMP for purchasing cane over the years, whereas excess sugar capacity in the industry led to lower realizations. The demand-supply scenario is reversing now with alternate uses of sugarcane established and most Indian mills are in a phase of expanding capacities – the last 24 months has seen a rally in sugar prices, which could very well be sustained over the next 2-3 years. Infact Japan, which imports 60 percent of its sugar, is looking at India for possible imports of sugar and ethanol as imports from Brazil is falling due to its diversion of more cane towards ethanol production.
To be successful in the global sugar markets Indian policies need to adapt swiftly to key structural changes on an ongoing basis. To cite an example during the late 1990’s crude prices were very low and the Brazilians didn’t find it profitable to buy gasohol, which was almost the same price as gasoline. A continuation of the same would have led to mounting losses for Brazilian ethanol manufacturers. It was at this juncture that the Government removed control over ethanol production and distribution, which allowed private Brazilian companies to export ethanol cheaply and recover their production costs. In India with the sourcing price of cane and selling price of ethanol fixed by the Government, mills would have to operate at high operating efficiencies to make good money. The selling price of ethanol should primarily be linked to crude oil, which would then make Indian mills producing ethanol breathe easy.
Rally in sugar prices Global sugar prices at present are close to 40 percent of their all time high achieved between 1966 and end 1974 when sugar prices went up more than 45 times. Sugar prices have begun to move up over the past 2 years and the rally is most likely to sustain on account of WTO’s ruling against the EU, strong domestic demand from India & China and increased amount of sugarcane being diverted to produce ethanol.
Sugar production in the EU could drop by 4 million tons over the next 3-4 years. Inspite of being one of the highest cost producers of sugar in the world the EU commands approximately 15 percent share of the entire sugar exports market globally, as it keeps domestic sugar prices approximately three times higher than export prices. In this manner the domestic prices in turn subsidizes sugar exports from the EU. This system was originally launched in the year 1967 under the Common Market Organization for sugar - is based on quotas, minimum guaranteed prices and tariff regulations and remains one of the last unreformed systems under the EU Common Agriculture Policy. In view of this cross-subsidization WTO has recently ruled that the EU would have to cut down subsidies on sugar, which would mean sugar exports from the EU becoming unviable. The EU is a dominant player in the global sugar market and produced approximately 21 million tons of which 8.3 million tons were exported during the year 2004/05. The WTO ruling has suggested price cuts of 43 percent for sugar beets and 39 percent for refined sugar, the volume implications of which could see sugar production in the EU drop by 4 million tons over the next 3-4 years. This decrease in global sugar supply is likely to push up sugar prices further.
High domestic demand in India and China is another factor to drive global sugar prices. The maximum production of sugar in India was during the year 2002-03, which yielded 20.1 million tons. With domestic consumption being close to 20 million tons and growing at a compounded annual rate of approximately 5 percent, sugar inventory levels would be at significant low levels. Whereas China’s per capita sugar consumption is one of the lowest in the world at 9.8 kg per person compared with the world average of 22. Also with rising income levels and the Chinese Government favouring increased sugar consumption by curbing consumption of saccharine, sugar prices are headed northwards. India and China are the highest consumers of sugar worldwide with combined sugar consumption at roughly 23 percent of global sugar production. The duo of India – China combined with crude prices would shape the destiny of future sugar prices. Sugar prices in India don’t exactly mirror global prices as both exports and imports are controlled by the Government – exports of sugar is banned till March 2007 whereas import duty is applicable at 60 percent from the next crushing season i.e. October2006 to September 2007.
Being the world’s largest producer and exporter of raw sugar, Brazil to a large extend determines global sugar prices. With the current rally in crude prices Brazil would look to benefit from both sides of the story. On one hand the Brazilian Government has increased the percentage of ethanol to be added with gasoline thus bringing overall petroleum costs down. On the other hand this increased diversion of cane to produce ethanol with result in lesser cane supplies to produce sugar, leading to high global sugar prices to benefit the Brazilian exporters – so everyone wants to be in Brazil’s shoes right now.
Power from sugarApart from the ethanol story, a by-product in the sugarcane crushing process called bagasse can be used to generate power. In the past when oil prices were low and sugar prices quite high, the mills used to get rid of bagasse as a residue. With current sugar prices nowhere near its all time high achieved during early 1970’s and spiraling crude prices, bagasse is now seen as a useful by-product to generate power and heat. Figures from ISMA confirm that 50 sugar mills are carrying out projects to produce 700 MW of power thus taking the total generation capacity to 1400 MW. Sugar mills operating such power co-generation projects also get CER’s (Certified Emissions Reductions) certified under the Kyoto Protocol and can then sell them to another party. Balrampur Chinni Mills has tied up with IFC, Washington for the sale of these carbon credits. Deficient power capacity in India along with increased by-product revenue streams for sugar mills makes a strong case for generating power from bagasse.
Miracles don’t happen overnight and it is not possible for sugar to alleviated energy security concerns completely
It would be very interesting to see how sugar pans out for India. If one looks at the strong position that Brazil is in now, it has to be understood that they started their sugar program way back in the 1970’s. India needs to be patient and should be watching crude oil and Brazil very closely before going in for aggressive capacity additions on the ethanol front. Nevertheless with India being one of the leading producers of sugar worldwide and with high crude price here to stay, fundamentals are in the right place for seriously considering sugar as alternate energy source and reduce our over dependence on the Middle East. One should also understand that sugar based ethanol program is not going to alleviate India’s energy security concerns completely, as crop-based ethanol program competes with agriculture resources that are require to feed billions of people.

Article Author : manish marwah