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JANUARY 14, 2007
 Letter From
 Message From
The Prime Minister
 Editor's Letter
 The Great Indian
M iddle Class
 India'S Poor
 The Next 15 Years

Flying High
The Indian aviation industry is growing at a rapid pace, thanks to air transport deregulation, emergence of new operators, lower fares and large untapped demand for air travel. The numbers tell an interesting story: India will require an estimated 1,100 aircraft. The average annual passenger traffic growth in India through 2025 is estimated at 7.7 per cent, well above the world average of 4.8 per cent and China's 7.2 per cent.

Bars Of Gold
The global gold industry is flourishing, largely fuelled by Asian demand and a weak US dollar. The boom is probably only halfway through since prices bottomed out in 2000. Since 1800, the boom and bust cycles have averaged about 10 years. While production is down, the value of gold purchased today is up 47 per cent from a year ago. The super-cycle of high metal prices is seen to be spurred largely by demand from China and India. An analysis.
More Net Specials
Business Today,  December 31, 2006
The Sector That Turned India Around

How and why services became India's growth engine.

It went whizzing: Services has been the star performer, expanding on average at around 9 per cent per annum since the economy was opened up in 1991

Kumar Ranganath is an articulate 36-year-old who failed to clear his senior secondary exams 20 years ago and, subsequently, became a cab driver. Today, he owns a fleet of 12 vehicles, including four Toyota Qualises and three Chevrolet Taveras, all of which ferry call centre and it workers to and from their offices. "Fifteen years ago, a person of my background, with limited education, could at best have hoped to become a peon in some office. But now, I employ 27 people including drivers, cleaners and mechanics. Getting bank loans at affordable rates has been a boon for me. More glass and chrome structures (he means IT/ITEs companies) coming up in Bangalore is good for my business," says Kumar, who recently bought a Rs 32-lakh apartment in the city. Kumar may or may not have heard of the "services sector", but he is-like millions of other Indians-both a participant in and a beneficiary of the boom in this sector.

Services has been the star performer within the overall gross domestic product (GDP) growth story, expanding on average at around 9 per cent per annum since the economy was opened up in 1991. Today, it contributes 54.1 per cent of the country's $720-billion (Rs 32.4 lakh crore) GDP and employs around 23 per cent of its estimated 497 million workforce. Little wonder then that the sector is now the engine of economic growth in the country. Says Siddhartha Roy, Economic Advisor, Tata Group: "With a population of over a billion people, India's advantage is clearly its manpower and the fact that it is a low-cost base for operations of any kind. So, India will have an advantage in any sector that requires manpower, and this will contribute to the growth of the economy by providing enormous employment opportunities."

» Fifty per cent of India's population is under the age of 25. Agriculture has been shedding people and industry can't add the 18 million people who join the workforce every year (almost equivalent to Australia's total population) fast enough. A majority of them enter the services sector
» Knowledge of English, largely a colonial legacy, has come in handy as English has become the de facto global business language
» Opening up of the telecom and financial services sectors have not only helped those sectors but have also had a significant multiplier effect on other parts of the economy like IT services
» Labour arbitrage; wages are lower in India
» Tax holidays and concessions provided in the early years
» A lack of adequately-trained man-power and demand-supply mismatch. (the IT and ITES industry itself faces a shortage of half-a-million trained personnel by 2010, according to NASSCOM)
» Any slowdown in global growth as Indian service industry gets increasingly integrated with global economy (the top 3 IT players get 70 per cent of their revenues from the US)
» Low productivity (profit per employee in the banking sector at around Rs 2.5 lakh per annum, is extremely low compared to developed countries)
» Anti-reform political platforms gaining momentum and social sector unrest

Services constitutes everything right from the more identifiable it and BPO sectors to financial services, retail and telecom. Even the activities of your friendly neighbourhood dhobi and the services rendered by your housemaid and by people like Ranganath are part of this economy. But the IT and ITEs sectors remain the most high profile components of this basket. But these sectors owe a large part of their success to the telecom sector.

India had a tele-density of 0.69 per cent in 1991-92 (in other words, there was one phone for every 150 people). Today, 10 years after the sector was opened up, the tele-density has improved more than 20-fold to 16.6 per cent. India today has more than 170 million telephone connections. "One of the main reasons for this growth is the confidence of the industry, arising from forward looking policies of the government, enabling regulation and fair play among players," says T.V. Ramachandran, Director General, Cellular Operators Association of India. It was this improved tele-connectivity that actually kick-started the success story of the Indian it sector. Adds Anant Koppar, outgoing President of MphasiS Technologies who is launching new start-up next month: "If it were not for the telecom revolution and dropping bandwidth prices, the it industry would not have come into being. The telecom revolution actually kick-started the process of India becoming the it services and BPO back office to the world."

A Combination of Factors

In fact, it has been a happy convergence of demand and supply side mechanics, favourable policy framework and congenial economic environment that has really fuelled this boom in the services sector. There were no malls in India in 1991; there will be 358 of them by the end of 2007. According to a recent media report, India has the largest number of shops in the world. Higher disposable incomes in the hands of consumers is creating demand for all kinds of goods and services, including for items that were considered "conspicuous consumption" till a few years ago.

From about Rs 250 crore in 1991, Indian IT services exports (including BPO services) touched $23.4 billion (Rs 1,04,130 crore) in 2005-06. The projection for 2010: $60 billion or Rs 2.7 lakh crore. Riding this boom, companies like Infosys Technologies, TCS and Wipro have grown into multi-billion-dollar giants. Consider this: Infosys, which was a Rs 5-crore company in 1991, is expected to end the current fiscal with revenues in excess of Rs 13,350 crore. India today commands a 65 per cent share of the global offshore market and a 46 per cent share of global business process outsourcing industry. Kiran Karnik, President, NASSCOM, the IT industry's advocacy and lobbying forum, says: "What has been achieved is commendable, but the future is even brighter. The opportunities in the KPO sector, engineering services and outsourced R&D are tremendous."
Indian tariffs are among the lowest in the world. Result: the country is adding more than 6 million new telecom subscribers every month since September, 2006-a world record. Driving this growth is the mobile telephone revolution that has driven tele-density in the country from an abysmal 0.69 per cent in 1991 to more than 16 per cent (and counting every month) now. This is a huge change from the time when one needed "influence" to get a telephone connection and the public sector monopolies used to fleece customers dry. All the major cell phone manufacturers-Nokia, Sony Ericsson, LG and Motorola, now have manufacturing bases in this country. In fact, the mobile telecom industry alone has generated 3.6 million jobs directly and indirectly and provides the government with annual revenues in excess of Rs 16,000 crore.

Ranjan Biswas, Head (Retail Practice), Ernst & Young, India, says: "The retail boom and development of rural markets have been significant contributors to India's employment numbers. They will also contribute to the development of infrastructure and cold chains in the country." Adds Kishore Biyani, CEO, Future Group: "Modern retailing, which is just taking off in India, is definitely one way to expand the economy. We have 15,000 employees managing 4 million sq. ft of retail space; this number will rise to 100,000 employees by 2010-11 as we expand our business." Says R. Subramanian, Managing Director, Subhiksha Trading Services, which plans to have 1,000 stores by the end of 2007: "The retail sector provides job opportunities to a broad spectrum of people. This phenomenon is not restricted to just the metros but encompasses people from all backgrounds. In our case, we employ 8,500 people and this number will increase to 20,000 by the end of 2007."

» Flexible labour laws
» Further opening up of the sector. For instance, 100 per cent FDI in retail
» Accelerate financial sector reforms; this will help make Indian firms globally competitive
» Investment in infrastructure
» A national services sector policy

And just as the development of the telecom sector helped in the growth of the IT sector, the emergence of a modern financial services sector helped all the other sectors of the Indian economy. How? The capital market absorbs large inflows from foreign institutional investors (FIIs) and domestic investors and feeds the financial needs of Indian corporates. Besides, the growth of the capital market has attracted intermediaries like private equity and other funds that also channel large sums of money towards cash-hungry Indian industries. Says Leo Puri, Director, McKinsey & Company: "The last decade has been transformational for the Indian financial services industry. It has been driven by two factors-the entry of a large young population into the working age category and the emergence of indigenous institutions." With Indian industry in investment mode and retail borrowers on a binge, the boom in the financial services industry looks set to continue for a while.

The Growth Drivers

But what exactly is driving the growth of the services sector in India? While the opening up of the sector to greater private participation (as in the case of financial services and telecom) has been one, it also has to do a lot with the entrepreneurial zeal of Indians. The colonial legacy-of a large English-speaking population-and the fact that English has become the de facto language of global business also helped sectors like IT and ITEs.


The last decade has seen the financial services sector in India attain a degree of maturity. From one that was often manipulated by powerful intermediaries, it has emerged as the primary conduit for funds for India Inc. and a credible investment vehicle for Indians. Indian households save 28 per cent of their disposable income, but less than half of this is captured by the financial system. Mutual funds, insurance and fixed deposits are the primary savings instruments in the country. The mutual funds industry now manages Rs 2,31,862 crore. The insurance sector has been slower off the block, but it is picking up now. But the banking sector, with assets of Rs 12,11,760 crore and deposits of Rs 9,87,360 crore, remains the backbone of the system.


There's a lot of action taking place in retail. The big news is, of course, Bharti Group's tie-up with Wal-Mart and its coming face-off with Reliance Retail (see Business Today's cover story Retail's Coming Face-off, dated December 31, 2006). But there's a lot else happening there as well. A host of other players, such as the Tata Group, RPG Enterprises, Aditya Birla Group, among others, also have massive plans for this sector. The organised players, who currently make up a minuscule 3 per cent of the Rs 14-lakh crore sector (about 40 per cent of GDP), are planning to invest about Rs 1 lakh crore over the next five years in their retail ventures. According to Ranjan Biswas, Head (Retail Practice), Ernst & Young, India, the retail trade is expected to grow to Rs 19 lakh crore by 2010, and to Rs 28.5 lakh crore by 2015. The size of organised retail is estimated to grow more than three times by 2010.

"India is fortunate to have a large techno-savvy, English-speaking talent pool that can tap the global opportunities," says Ashima Goyal, Professor, Indira Gandhi Institute of Development Research, adding: "While direct employment in ITEs is one million, the spillover to other jobs such as transport, catering, etc., has created another four million jobs." The multiplier effect is all too apparent, but Goyal is quick to add: "Unless the manufacturing sector expands, people lower down the skills scale will remain unemployed. IT companies have already realised the fact that only 25 per cent of India's engineering graduates are employable and, so, are setting up training schools to bring the others up to the mark."

But there's a flip side to this. The services boom is creating huge income disparities. True, it is creating a number of high skill, high paying jobs; but it is also creating a much large number of jobs that require less skills and so give their holders much less income mobility. Then, a global slowdown can have a severe impact on the growth of export-led services (like IT and ITEs), and cause disruptions in sectors that draw sustenance from these. And this, in turn, can cause social unrest and trip up, or retard, India's splendid story so far. The services sector is on song right now and is providing India with the growth momentum, but it's time for the other two engines of the economy (agriculture and industry) to start firing if the economy has to sustain its momentum.




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