This new year's eve, captains of Indian industry won't have to look high and low for an antidote to their hangover. Instead, they could simply reach for their PDAs and look at all the regulatory and policy changes due in 2005. They'll likely find enough to sober the worst carouser. Starting January 1, 2005, the textile quota system of 40 years will end and exporters, big and small, will have to fight for a share of the world markets. On the same day, a new regime of product patents will put an end to Indian Pharma's lifeblood-reverse engineering (product patents could affect chemical and agriculture industries too); India's free trade agreement (FTA) with Thailand will also come into effect that day, taking 82 items (including things like office machines, ball bearings and aluminium alloys) off the import duty list.

That's not all. As a signatory to the Information Technology Agreement of December 1996, India will have to allow the import of 217 items, related to computer hardware and telecom, free of duty from March 1. And come April 1, auto manufacturers and petroleum refining and marketing firms will have to meet stringent Euro III emission norms. That apart, Indian industry will have to grapple with a "fractured" value added tax (vat) that will be slapped on top of central sales tax.

Feeling sobered already? Don't blame you. By any measure, 2005 will be an extraordinary year. At no time, possibly with the exception of 1991, has India Inc. had to manage such a tectonic shift. Can it cope? Philosophically, yes. After all, the same question was asked 13 years ago when the economy was opened up. And to their credit, Indian companies have fared rather well. The bigger and better ones have consolidated their position within the country, and even gone abroad to sell and acquire companies. But it will be harder this time around because between 1991 and now,

India has squarely positioned itself on the radar of large manufacturers elsewhere. Which means fighting competition will be harder now for companies in India (note: we aren't saying Indian companies).

But just what are these challenges, how will they impact corporate India, and what can it do about them? Here's the lowdown:

A Quota-Free World
Will the Chinese export juggernaut steamroll India in the global garments and textiles market?

"I think we are faced with bigger challenges than we have conceptualised" S.P. Oswal, Chairman, Vardhaman

A recent WTO report entitled "The Global Textile and Clothing Industry post the Agreement on Textiles and Clothing" predicts that both India and China will triple their shares of the US clothing market following the lifting of import quotas on January 1, 2005. That should be music to the ears of Indian exporters, who have waited for years for the 40-year-old quota regime to end so that they could increase their 3 per cent share of the world textiles and clothing market.

However, opinion is divided on who'll win and who'll lose. Analysts like Prof. Manoj Pant of the School of International Studies at Jawaharlal Nehru University believe that while the end of the quota regime opens up a world of opportunity for India, it also throws up a host of challenges. Therefore, the real issue is whether Indian exporters can capitalise on this opportunity.

Pant's argument is two-fold. First, expansion of exports is all about on-time delivery of consistently high-quality items, requiring large-scale production. But such companies, who can meet the needs of, say, a Wal-Mart or a Gap, can be counted on two fingers. The smaller players are not integrated enough into the value chain to carve out a future as new suppliers to big manufacturers.

Second, continuing reservation of certain items in the small-scale sector not only prevents entry of larger firms but also the entry of much-needed FDI. As a result, the scaling up of operations that the industry so desperately needs will not happen anytime soon. For others like S.P. Oswal, Chairman of Vardhaman Group, it is India's lack of competitiveness vis-à-vis China that worries him the most. And that includes the absence of across-the-board superlative manufacturing capability. "I think," he cautions, "we are faced with bigger challenges than we have conceptualised."

Then, unless infrastructure-road, sea and air transportation-improves dramatically it could be difficult to take advantage of emerging opportunities. Reason: Major buying houses expect deliveries within 60 days of ordering a consignment, and if the stocks get held up, the exporter takes the hit, not just financially, but also in respect to future orders. Thus, while bigger companies like Raymond, Arvind Mills and Vardhman may benefit, smaller ones will likely find the going rather tough.

The Coming Deluge
Will hardware manufacturers be swamped by duty-free imports?

"We are confident that we will continue to lead the pack despite the zero-duty regime" Ajay Chaudhuri, CEO, HCL Technologies

As a signatory to the Information Technology Agreement of December 1996 as part of the WTO package, India is under an international obligation to phase out all duties on 217 it and telecom products by 2005. These range from motherboards to printers to computers. What this means is that these items can now be imported at zero duty from anywhere in the world. Will it kill hardware manufacturing in India? Unlikely, says Ajay Chaudhuri, CEO of HCL Technologies, the market leader in PCs. "We are confident that we will continue to lead the pack despite the zero-duty regime."

Perhaps the bigger ones will survive, but what about smaller players? None of them has the strengths that Chaudhuri cites in the case of HCL. Things like a nation-wide network of 300 service centres, or product technology adapted to the peculiarities of the local market (think electric surges). One option for them could be to move into special economic zones (SEZs) or electronic hardware technology parks (EHTPs), which are virtually treated as foreign countries and hence offer benefits such as duty-free imports. Vinnie Mehta, Executive Director of hardware association MAIT, says that the relocation is already beginning to happen in the case of printer and power supply manufacturers. Yet, for a whole lot of others the cost of relocation may be too big to be viable.

The real issue, says Mehta, is to make the playing field level for all. For instance, how can local manufacturers, who import components and pay customs ranging from 5 to 15 per cent, be expected to compete with built-up hardware that's imported free of duty into the country? They can't. As of now, a shakeout in hardware looks inevitable. As for India's ambitions of making it big globally in hardware, it'll be a tall, tall order.

"Those with weak R&D will eventually go out of business" Satish Reddy, MD, Dr. Reddy's Labs

The Thai Threat
Will the Free Trade Agreement (FTA) help Thailand more than India?

Ever since the Indian government inked an FTA with Thailand in October 2003, some of the major consumer goods companies like Sony India and Panasonic have been soft-pedalling their India manufacturing plans. Sony even discontinued production of audio equipment in the country recently, opting to import from Thailand where it has a large manufacturing base. Why? It's simple economics. The FTA allows goods to be traded at low or zero duties. For instance, CTVs and refrigerators can be imported into India from, among other places, Thailand at zero duty. But ironically, local manufacturers of these products have to pay import duty of between 8 and 20 per cent on raw materials like polymer and steel. Worse, there are a multitude of state taxes and rules that any local manufacturer has to negotiate while selling within the country, whereas an exporter from Thailand can simply ship directly to one of the three major ports. Notes K.R. Kim, MD, LG Electronics: "FTAs are usually encouraged after suitable adjustments have been made to the tax and duty structures and making sure that there are no hidden barriers."

To add to the woes of Indian companies, a value added tax (vat) is to be imposed from April 1, 2005, alongside the central sales tax system. The total tax differential between an imported and a domestically-manufactured product will then be to the tune of 6.25 per cent, point out market analysts. And being a part of ASEAN, Thailand has greater access to better vendors. But since the FTA cuts both ways, won't Indian companies benefit similarly? Unlikely. The Thai market is relatively small and saturated. Take the case of CTVs. The local annual demand is a mere 1.5 million sets, whereas annual production capacity is a staggering 12 million. Therefore, unless the government takes a host of measures to provide a level-playing field, the future of the Rs 20,000-crore consumer electronics and durables industry, among a few others like the fast moving consumer goods industry, could be in jeopardy.

The Patent Paradigm
Will product patent spell doom for small drug manufacturers?

"FTAs are encouraged after adjusting tax and duty structures K.R. Kim, MD, LG Electronics

Starting next year, Indian Pharma will fall in line with the wto-mandated product patent regime and say goodbye to process patent, which allowed it to copy drugs launched by manufacturers elsewhere and build a Rs 23,000-crore industry. Just how will this impact an industry where the biggest player, Ranbaxy, is a minnow in comparison to a global giant like Pfizer? Interestingly, it will be business as usual for the next three or four years. Why? 80 to 90 per cent of the market comprises drugs whose patents have expired. And since the new regime only prohibits copying of drugs where patents are still valid, revenues will not be affected in the short term. Says Rajiv Gulati, MD, Eli Lilly: "Two or three patented drugs may be launched next year at higher prices, but the bulk of the market will not change in terms of pricing and availability."

But thereafter, the pharma world will get divided into winners and losers. Winners will be companies that have the R&D capability to quickly launch copies of drugs that go off patent. But launch not in India, but markets like the US, Germany and the UK. Why? The domestic market, a battlefield of (10,000-odd) drug manufacturers, hasn't been growing in value because of price wars. On the other hand, developed markets are shifting towards low-priced generics due to exorbitant healthcare costs. And losers will be companies that haven't made this leap. Says Satish Reddy, MD, Dr. Reddy's Labs: "Those with weak R&D will find their product pipeline drying up and eventually going out of business."

Such companies could become manufacturers and marketers of drugs for MNC and big Indian companies, or focus on bulk drugs, where they need superlative process skills to eke out profits. Warns Reddy: "Indian companies need to chart out their gameplan clearly because the market will witness a lot of consolidation." Those who don't will have only themselves to blame, since the writing on the wall has been there for the last 10 years.

"We will scale up our operations to meet the needs of Indian market" Rajiv Dube, VP, Tata Motors

Trouble Under The Hood
Will automakers be able to pass on Euro-III compliance costs to consumers?

It was the Mashelkar committee's "National Auto Fuel Policy" report in 2002 that first recommended the implementation of Euro iii emission norms in 11 major cities and Euro II norms throughout the country by April 1, 2005. (The big cities have had Euro II since 2000.) The report also stated that the auto industry would need to make investments of around Rs 18,000 crore up to 2005, and oil companies Rs 25,000 crore, to achieve compliance. The more exacting Euro III norms are aimed at reducing the sulphur and aromatic content in petrol and diesel fuels and, therefore, cleaning up the air over Indian cities.

That date is less than five months away. How prepared are India's auto and oil companies? Here's a surprise: Most of the oil and auto companies contend that they are all geared up. "As far as our company is concerned, some of our cars like the Safari, the Indica and the Indigo are already Euro-III compliant since we already export them to Europe. But the point now is to scale up our operations to meet the needs of the Indian market," says Rajiv Dube, Vice President (passenger car division), Tata Motors.

That really is the tricky part. Changes in engine technology to meet the new emission norms will mean significant expenditure for the manufacturers. That in turn could raise car prices by Rs 15,000 to Rs 20,000, according to Dube. Then, there is the issue of getting the automotive vendors to deliver parts that are geared to the Euro III emission technology. As of now, car manufacturers are not clear whether they would be able to pass on the added costs to consumers. It's a sort of catch 22 situation. If they do, they run the risk of hurting demand. If they don't, their bottom line will take a hit. Already, despite hikes in steel and rubber prices, most car manufacturers have refrained from raising prices for fear of losing market share. It's unlikely, therefore, that they would be willing to absorb the Euro III costs too. What may happen is that the industry association will lobby for excise duty cuts in the next budget or some kind of import duty relief or sops for becoming Euro III compliant. But given rising incomes and falling tariff levels, the India automotive industry will easily negotiate this bump.