A credit rating downgrade, corruption scandals, the poor performance of select sectors, rising inflation and slowing growth - such factors combined generated the urgent need for corrective action. This action needed to go beyond incremental changes to existing policies; it needed to entail the ushering in of far-reaching structural reforms to help bolster economic growth in the country.
In this context, on 14 September 2012, the Government of India announced reforms in a few key sectors, which appear positive and have created a buzz among investors. The government approved the proposal to allow foreign airlines to acquire up to 49 percent1 in airline companies and permitted foreign direct investment (FDI) of up to 49 percent1 in power exchanges. Further, it has raised the FDI limit in various services of the broadcast sector from 49 percent to 74 percent2, and most importantly, it has allowed 51 percent1 FDI in multi-brand retail and has also resolved a long-running dispute on this subject.
Source: KPMG in India Analysis; “UPA unleashes big-ticket economic reforms: India Inc cheers FDI in retail, aviation and power exchanges”, The Economic Times, Sep 15, 2012; “FDI in broadcast to spur digitization”, Business Standard, Sep 15, 2012
FDI in Retail
For several struggling retail companies in India, the government’s decision on allowing FDI in the sector has renewed hope within the sector. However, the policy comes with several strings attached - FDI of 51 percent3 has been allowed in cities with populations of over one million, and states can choose not to allow foreign players. Another caveat attached to this policy is that at least 30 percent3 of the goods should be sourced from local suppliers. The policy also mandates at least 50 percent3 of the minimum investment amount of USD100 million must be invested in back-end operations; therefore, multi-channel retailing may attract significant IT investment.
Considering the sub-optimal state of back-end infrastructure in India - including cold chain storage, supply chain management and inventory management - this measure could give a much needed boost to the sector that faced a wastage of around 7 percent of total produce, or nearly USD 10 billion4 (INR 50,000 crore), in 2010–115.
This may lead to IT diffusion through back-end infrastructure upgrades, the revamp of supply chains, and initiatives to augment the front-end customer experience. This is expected to significantly increase demand for solutions such as supply chain management (SCM), customer relationship management (CRM), and analytics.
FDI in Aviation
Most airlines in India are currently running under losses and are in a dire need for capital investment to write off accumulated losses. A price war due to intensifying competition and rising fuel and wage costs are further adding to the plight of this sector. Until now, FDI in aviation was allowed only from non-airline investors. The government has now removed this restriction and is allowing foreign airlines to invest in the sector. While many industry veterans believe that the sector is not in the shape to attract foreign investors, as most companies struggle with finances, growing passenger traffic does seem to create a case for India.
The initiative is seemingly positive and may lead to a surge in investments in IT solutions such as ERP systems, on-premise solutions for manufacturing, supply chain, financials, as well as BPO based customer service operations for airlines.
FDI in Power
The government has permitted FDI of up to 49 percent in power exchanges with a limit of 26 percent on direct investment and 23 percent on institutional investment. The move is expected to inject more capital into the sector, make the market increasingly competitive and encourage global best practices. However, as in the aviation sector, many feel that the country’s merchant power market is not mature enough to attract many foreign players. In India, merely 2–2.5 percent6 of the total electricity demand is traded in exchanges, and customers appear only in times of a supply shortage.
Nonetheless, the market is still amid transition and is yet to rise to the level of developed markets. The FDI move can be expected to generate muchneeded capital funds to upgrade infrastructure, improve operating performance and address the capacity constraints of utility companies to unlock the growth potential of the sector.
As foreign investments start flowing in, India’s power sector is likely to witness the modernization of utility companies as well as infrastructure upgrades. There lies a window of opportunity for IT players in the utilities segment for the sale of solutions such as smart metering, smart grids and gas transportation management systems.
FDI in Broadcasting
The Government has also raised the FDI limit to 74 percent in broadcast services such as direct-to-home (DTH), head-end in the sky (HITS) and cable television.7 The only exceptions are television news channels and FM radio, where the existing limit of 26 percent will continue. Before the amendment, 49 percent of foreign investment was allowed in cable TV and DTH and 74 percent in HITS.7 While the recent measure is positive for the industry, the cross-holding restriction under which a broadcast company is not allowed to have more than a stake of 20 percent in broadcast service providers in India may reduce the positive impact to some extent.7
The move is also expected to spur the digitisation of the existing network, increase the deployment of set-top-boxes and overhaul back-end systems, which requires investments. This will likely increase the demand for IT solutions such as digital media platforms, data standardization platforms, digital rights management and content rating frameworks.
IT as an Enabler for Reforms
Economic and policy reforms in these sectors is expected to see a significant amount of infrastructure overhauling which would be enabled through IT. IT is expected to act as a strategic lever to bring in efficiencies and drive the next phase of growth in these sectors. Firms in these sectors will have to form a comprehensive IT strategy to put all the pieces of information together and get a comprehensive view of the entire organization. Some of the key IT-BPO solutions and services for these sectors would be:
- Retail: Supplier management, product information management, supplier portals, reverse logistics, procurement, fulfillment, analytics, forecasting, inventory management, RFID, logistics, e-Commerce, point of sale, multichannel integration, promotions management, campaign management, loyalty management, CRM, master data management, retail analytics
- Aviation: BPO services, E-commerce portals, reservation and ticketing systems, airport operations systems, loyalty programme systems, fares, pricing and GDS (global distribution systems), commercial systems, revenue accounting systems, corporate and consumer travel solutions, back office integration solutions
- Broadcast: Broadcast management systems and syndication systems, rights and contract management systems, content management systems and editorial collaboration platform, broadcast managed services and media advisory services.
To support growth in these sectors, investments would be required to build a robust and futuristic IT infrastructure which can be benchmarked against global standards.
KPMG in India's point of view
As fears of a slowdown loom large, undertaking major reforms is the need of the hour. In such a situation, the government has rightly taken a bold step forward despite opposition from other political parties and has opened up select sectors to foreign investment. The government’s efforts are expected to boost investor confidence and have created ripples across India Inc., with stocks of various industries rising.
The move is also expected to give major impetus to Asia’s third-largest economy, which has been labelled as ‘becoming stagnated.’ The IT sector, which acts as a horizontal function for all the other sectors, will likely be a critical enabler for the modernization of the sectors that have been opened. The impact of this move on IT industry could be multi-fold. Sectors such as retail, aviation, power and broadcast could grow in size. With an overall increase in the size of the pie, IT vendors in these sectors would, thus, have the opportunity to scale up their operations.
Moreover, with the entry of foreign players, these sectors are expected to adopt global practices and move toward upgrading existing shambolic infrastructure and, therefore, generate the inflow of IT investments. Domestic and MNC IT firms need to seize the moment and introduce a bouquet of offerings to help firms in these sectors.
Sources:
1. “UPA unleashes big-ticket economic reforms: India Inc cheers FDI in retail, aviation and power exchanges”, The Economic Times, Sep 15, 2012,
2. “FDI in broadcast to spur digitization”, Business Standard, Sep 15, 2012
3. “FDI in retail and aviation sectors set to become a reality now”, The Economic Times, Sep 21, 2012
4. Exchange rate used: 1 USD = 50 INR
5. “Farm produce waste pegged at 7%, or Rs 50k cr”, The Times of India, Sep 2, 2011
6. “FDI in Power Exchanges: Market not mature to attract foreign players, says industry”, The Hindu Business Line, Sep 14, 2012
7. “FDI in broadcast to spur digitization”, Business Standard, Sep 15, 2012