Doing Business in India

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Diverse is the one word that describes India best. With an area approximately one-third the size of the USA, it is

home to over 1.25 billion people of considerable economic, ethnic, linguistic, cultural, and religious diversity. After

almost two hundred years of British colonial rule, India gained its independence in 1947. Today, it has 30 states and

7 union territories with New Delhi being the capital. India considers itself the largest democracy in the world.

The Indian north is more populous than the rest of the country, with Uttar Pradesh being the most populous state in

India. The north has predominantly agricultural activity, and Punjab is the leading agricultural state in the country.

Industrial development is moderate.

The India south is well developed and relatively affluent with strong agriculture and industry. The region is the leader

of the Indian IT sector, and Bangalore and Hyderabad are considered the Indian equivalents of the US Silicon Valley.

It also has good coastal and land transportation infrastructure. This combined with the relatively higher incomes

make the Indian South a typical entry point for new imported products, as well as a favorite test marketing region.

The India west is the best developed part of the country with comparatively higher per capita incomes. The states

Maharashtra and Gujarat are considered the industrial hub of India and attract most foreign investment. Mumbai,

the capital of Maharashtra, is the financial capital of the country and a very important center for industrial activity.

Opposite to the Indian west, the east and northeast regions are the least developed and poorest with a huge gap

between the urban and rural populations. On the other hand this region is the major source for some natural mineral

resources, such as coal, iron, and bauxite.

INDIA : Country Background

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Population:

The Indian population is close to 1.25 billion people, representing one-fifth of global population. There are more than

1,000 languages spoken in the country, nearly 400 of which are spoken by more than 200,000 people. However, only

18 are officially recognized, and Hindi, the primary tongue of 30% of the population, is India’s national language.

Various States also have their own official languages and some of the most widely spoken ones are Punjabi, Bengali,

Tamil, Gujarati, Urdu, Telugu, and Marathi. In addition, English which enjoys associate status is the most important

language for international and commercial communication.

Age:

The Indian population is young. Only 5% of the population is older than 65 and over 30% is under 15 years of age.

Indeed, the US Census Bureau International Database indicates that just over 50% of the population is younger than

25. Generational differences can often be translated into eating patterns. The younger generation of Indians is more

westernized in their eating habits than older generations, particularly those in higher income groups. Younger

professionals are more open to experimenting with food products, as their lifestyles resemble their counterparts in

western societies. They consume more packaged, processed foods and give greater importance to quality, time, and

convenience.

Religion

Food habits in India are influenced by religious principles. Despite the common belief that most Indians are vegetarians,

over 75% of the population eats meat. However, there are some taboos on the specific foods and meat in particular.

The table below outlines some of the eating practices of the major Indian religions.

INDIA : Country Background

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INDIA : Country Background

Religion Eating habits

Hinduism All income groups in upper castes are strict vegetarians, Lower castes are mostlynon-vegetarians.Taboo on beef in all castes, as bovines are considered sacred

Islam Non-vegetarian, Taboo on porkPreference for halal meat

Christianity Mostly non-vegetarian with no taboos

Sikhism Some sects are vegetarians, and some are not

Buddhism Mostly vegetarian

Jainism Strict vegetarians

Religion wise consumption pattern

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Types of business entities in India:

• Sole Proprietorship:

- Under SP the entrepreneur has right to decide the name & even start the business activities solely.

- He is the sole risk bearer for the profit & loss earned.

• Partnership firm:

- 2 or more people coming together for the purpose of business is called partnership firm.

- Types of partnership firm:

a. Limited Liability partnership firm.(LLP)

b. Unlimited Liability partnership firm.

• Company:

It can defined as:

- Separate legal entities.

- Distinct from the members.

- Perpetual existence

- Common seal.

Governed as per rules & regulations of the Indian Companies Act, 1956.

Business Structure in INDIA

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Tax Structure in INDIAA well developed tax structure with a three-tier federal structure, comprising thefollowing:

The main taxes/duties that Union Government is levy are as follows:

Union Government

State Governments

Urban/Rural Local Bodies

Tax levied by Union

Govt

Income Tax

Customsduties

CentralExcise

Sales Tax

Service Tax

State Govt.

Sales Tax

Stamp Duty

State Excise

Land Revenue

Duty on Entertain-

ment

Tax on Profession& Callings

Local Bodies

Properties Octroi Tax on

Markets

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Direct tax:Taxes which are directly levied by the Government are known as direct tax. One of the form of direct tax isIncome Tax which is filed every year.

Direct tax is bifurcated in the following category:

Personal Income Tax. Corporate Income Tax.- Charged as per the slabs - Domestic companies charged @ 30%

plus surcharge of 10% & education cess of 3%

- Foreign company it is @ 40% plus surcharge of 2.5%

Indirect tax:Taxes which are indirectly levied by the Government are known as indirect tax. Different form of indirect tax are sales tax, service tax, Excise duty, VAT & etc.

Central Sales Tax:

The CST Act, passed by the parliament regulates & provides for levy of sales tax on the sale & purchase of goods made in the course of inter-state trade or commerce. Sales & Purchase made within a state are regulated by the sales tax law of each individual states.

Type of Tax in INDIA

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Value Added Tax (VAT):

• It’s a tax on sale of goods.

• Sales tax is levied both under the Central Sales Tax Act, 1966 (CST) as well as under State Sales Tax Acts.

• It refers to a tax on the value added at each link in the distribution chain.

• It’s a tax levied at every transaction on the value addition made.

• The rate of VAT is proposed to be 12.5% barring few exceptions.

Excise Duty:

• It’s a tax levied on production or manufacture of goods.

Service Tax:

• It’s a tax levied on services rendered.

• Service tax in INDIA is governed by the provisions of the Finance Act, 1994.

• Service tax is a tax levied on specified services only.

• Current rate of service tax is 10% of the value of service rendered.

• Government has exempted service tax on export services.

Type of Tax in INDIA

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• The Government has formulated and implemented several schemes to provide financial assistance for setting up and modernizing of food processing units, creation of infrastructure, support for research and development and human resource development in addition to other promotional measures to encourage the growth of the processed food sector.

• The Centre has permitted under the Income Tax Act a deduction of 100 per cent of profit for five years and 25 per cent of profit in the next five years in case of new agro processing industries set up to package and preserve fruits and vegetables.

• Excise Duty of 16 per cent on dairy machinery has been fully waived off and excise duty on meat, poultry and fish products has been reduced from 16 per cent to 8 per cent.

• Most of the processed food items have been exempted from the purview of licensing under the Industries (Development and regulation) Act, 1951, except items reserved for small-scale sector and alcoholic beverages.

• Food processing industries were included in the list of priority sector for bank lending in 1999.

• Automatic approval for foreign equity up to 100 per cent is available for most of the processed food items except alcohol, beer and those reserved for small-scale sector subject to certain conditions.

• Full repatriation of profits and capital has been allowed.

• Zero duty import of capital goods and raw material for 100 per cent export oriented units.

• Sales of up to 50 per cent in domestic tariff area for agro based, 100 per cent export oriented units is allowed.

• Full duty exemption on all imports for units in export processing zones has been done.• The Government of India is giving cash subsidy maximum Rs.50Lacs and also various other

subsidy towards quality and R & D Expenses. Few State Government provide interest rate subsidy and other benefits.

The Government has taken several initiatives to support

Food processing sector

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GDP Growth Rate

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Year 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

GDP Rate 5.5 6 4.3 8.3 6.2 8.4 9.2 9 7.4 7.4 10.4 7.2 4.7

0

2

4

6

8

10

12

1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

G

D

P

R

a

t

e

Year

Government of India decided to bring out the National Manufacturing Policy to bring about a quantitative andqualitative change with the following six objectives:

I. Increase manufacturing sector growth to 12-14% over the medium term to make it the engine of growth for the economy. The 2 to 4 % differential over the medium term growth rate of the overall economy will enable

manufacturing to contribute at least 25% of the National GDP by 2022.II. Increase the rate of job creation in manufacturing to create 100 million additional jobs by 2022. III. Creation of appropriate skill sets among the rural migrant and urban poor to make growth inclusive. IV. Increase domestic value addition and technological ‘depth’ in manufacturing. V. Enhance global competitiveness of Indian manufacturing through appropriate policy support.VI. Ensure sustainability of growth, particularly with regard to the environment including energy efficiency, optimal utilization

of natural resources and restoration of damaged/ degraded eco-systems.

In order to achieve these goals:-I. Foreign investments and technologies will be welcomed while leveraging the country's expanding market for manufactured

goods to induce the building of more manufacturing capabilities and technologies within the country; II. Competitiveness of enterprises in the country will be the guiding principle in the design and implementation of policies and

programmes; III. Compliance burden on industry arising out of procedural and regulatory formalities will be reduced through rationalization

of business regulations. IV. Innovation will be encouraged for augmenting productivity, quality, and growth of enterprises; and V. Effective consultative mechanism with all stake holders will be instituted to ensure mid-course corrections.

Benefits of this policy:

• Asset Redeployment• Exemption from Capital Gains Tax• Job Loss Policy• Sinking Fund

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National Manufacturing Policy (2011)

Food Processing

• The food processing industry provides crucial connections between industry and agriculture. To aid the growth of the food processing industry, the government has implemented schemes including the setting up food parks, packaging centers, integrated cold chain facilities, value-added centers, and modern abattoirs.

• ‘Vision 2015’ undertaken by the Ministry of Food Processing Industries entails:

• Three-fold growth in the size of the processed food sector.

• Increasing level of processing of perishables from 6 per cent to 20 per cent.

• Value addition to be raised from 20 per cent to 35 per cent.

• Share in global food trade to go up from 1.5 per cent to 3 per cent.

• Despite India having a huge agricultural production base, its share in exports of processed food in global trade is only 1.5 per cent; whereas the size of the global processed-food market is estimated at US$ 3.2 trillion and nearly 80 per cent of agricultural products in the developed countries get processed and packaged.

• Consequently, there is a tremendous potential for export-led growth and investment in this sector.

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Godrej Industries LtdGodrej Industries Ltd, a member of the Rs. 45 billion (US$ 1 billion) Godrej Group is India's leading manufacturer of oleo chemicals and food products. The foods division of Godrej Industries produces and markets edible oils, vanaspati, bakery fats, fruit drinks, fruit nectar and tomato puree. The company’s strategy is to increase capacity utilization in edible oils and to tap the niche health conscious market.

MTR Foods LtdMTR Foods Ltd is an ISO 9002 and HACCP certified company is amongst the top five processed food manufacturers in India. Theymanufacture, market and export a wide range of packaged foods to global markets that include USA, UK, Australia, New Zealand,Malaysia, Singapore, UAE and Oman. Their wide range of products include ready-to-eat curries and rice, ready-to-cook gravies, frozen

foods, ice cream, instant snack and dessert mixes, spices(turmeric, coriander, black pepper) and a variety of accompaniments like pickles and papads. The strategy followed is competitive pricing and labor intensive products that predominantly cater to the Indian palette.

Parle Private LtdParle is the second largest producer of biscuits in the organised sector. In the popular brands segment, its Parle G remains a popular brand in the glucose biscuit segment. In the premium segment, its Hide and Seek is attracting competition due to the sway it holds in the market place. In the saltish biscuits, Monaco has been quite popular, especially in the cocktail circuit. Parle's, however, derives a major part of its revenues from the low-priced products. The company has, nevertheless, outpaced the industry growth in step with the market leader Britannia. Parle Products is setting up a new biscuit manufacturing unit at Pantnagar, Uttaranchal.

Britannia Industries LtdA leading player in the Indian organised biscuit market with nearly 30 per cent value share. The Nusli Wadia group, one of the oldest business houses in India and Groupe Danone, French multi-products food company, equally share the 48.5 per cent promoter holding in Britannia. It mainly caters to the bakery products segment with a product portfolio of biscuits, flavoured milk, dairy whitener, ghee, bread, cake and rusk.

Hindustan Unilever Limited (HUL)The parent company Unilever is a Fortune 500 transnational, which sells Foods and Home and Personal Care brands in about 100 countries worldwide. India’s largest fast moving consumer goods company, with leadership in Home & Personal Care Products and Foods & Beverages. It caters mainly to the beverages, staples, snacks and dairy products with a wide range of products like tea, instant coffee, biscuits, ice creams, salt, wheat flour, instant drinks, soups, jams and squash.

In addition, India also has a large unorganized manufacturing sector, of small producers offering very low priced products. There are no statistics about the size of the unorganized sector, but according to some industry sources, the unorganized sector can account for up to 50% of the market. We believe that this figure is exaggerated, but the main point is that the unorganized sector still plays a very important role in India, although it will gradually begin to decline.

Manufacturers and key players in market

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Bakery industry in India is the largest of the food industries with an annual turnover of about Rs. 3000 crores. India is

the second largest producer of biscuits after USA. The biscuit industry in India comprises of organized and

unorganized sectors. Bread and Biscuits form the major baked foods accounting for over 80% of total bakery Products

produced in the country. The quantities of bread and biscuits produced are more or less the same. However, value of

biscuits is more than bread. The industry has traditionally been and largely continues to be in the unorganized sector

contributing over 70% of the total production. Bakery products once considered as sick man’s diet, have now become

an essential food items of the vast majority of population.

Market dominated by the unorganized sector

• Market for bakery products in India is currently pegged between €2.9- 3 Bn and has been growing at a value CAGR of 9-10% during CY05-10

• Currently the biscuits market is largely organized with the organized segment accounting for 65-70% of the market by volume where as for break, cakes & pastries continue to be largely unorganized

• Sales of bread, cakes & pastries are driven by independent standalone alone bakeries which cater to local tastes and are priced economically

• Strong regional play

• Baked goods segment is dominated by the presence of a large number of regional and city-specific bakeries; This is mainly on account of

– Relatively short life of baked goods, which creates a barrier for national players to expand distribution

– Perception of Indian consumer to prefer “fresh food” over packaged foods.

– Exampled of regional players include Harvest Gold Food India in Delhi NCR, Model Bakers & Confectioners in Mumbai, VB bakery, Kaggis bakery and Warrier bakery in Bangalore, Universal bakers and Karachi bakery in Hyderabad, Mcrennet and Hot breads in Chennai among others

Market Segments

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Bread Products

The size of the bread market is estimated at Rs 15 bn. There are a number of producers in both sectors, organized

and unorganized.

Modern Foods, a Central public sector undertaking, and a leader in the bread segment was privatized by the

government in a strategic sale to Hindustan Lever at a price of Rs 1054 mn. The later was to induct a fresh equity of

Rs 200 mn into the company, while the government retained 26% equity, giving it the right to block special

resolutions. The deal marks HLL's entry into bread making, having already forayed into ice creams and marketing of

flour under the brand name Annapurna. This was its first foray into baking business. Modern Foods had nearly half

of the organized market to itself.

Britannia’s bread market share declined sharply in 1995-96 and continued till 1998-99 mainly because of the

competition from Modern Foods. However with the takeover of Modern Foods and the time spent in restructuring

has enabled Britannia to have a major share of the bread market.

Earlier, Britannia introduced Premium Bake, premium bread. The brand created a high-end segment for the

daily staple item used by all segments. Britannia has since been joined by other bread manufacturers like

Candico (India), Elite Breads and a host of others with small market presence.

Market Segments

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Demand - Past & Future

Year Th MT

2000-01 11.9

2001-02 12.85

2002-03 13.85

2003-04 14.8

2004-05 15.85

2005-06 16.9

2006-07 17.9

2007-08 18.95

2008-09 20

2009-10 21.1

2014-15 26.9

Market Segments

Market Segmentation

Segment Share (%)

Organized15

Informal85

North35

East10

West30

South25

Product Variation

Segment Share (%)

Milk Bread 85

Brown Bread 10

Fruity 3

Nutritional and other specialty

2

From a low priced commodity, bread has graduated into a branded product with discriminating prices. Barring Premium Bake, the others are priced high - almost double the standard bread brands. Premium Bake comes closer to the 'normal' price, a mid-way pricing strategy.

Source : Ministry of food processing Industries

Bread Products

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The Indian bakery industry is dominated by the small-scale sector with an

estimated 50,000 small and medium -size producers, along with 15 units in the

organized sector. Apart from the nature of the industry, which gravitates to the

markets and caters to the local tastes, the industry is widely dispersed also due

to the reservation policies (relating to the small scale industries) of the

government.

Biscuits and bread which are considered to be the major bakery product and

they account for 82% of all bakery production. The unorganized sector

accounts for about half of the total biscuit production estimated at 1.5 million

tonnes. It also accounts for 85% of the total bread production and around 90%

of the other bakery products estimated at 0.6 million tonnes. The last includes

pastries, cakes, buns, rusks and others.

Britania Industries has made an investment of Rs 600 million for its capacity

expansion project at Pantnagar. Parle is the second largest producer of biscuits in

the organised sector. In the popular brands segment, its Parle G remains a popular

brand in the glucose biscuit segment. In the premium segment, its Hide and Seek is

attracting competition due to the sway it holds in the market place. In the saltish

biscuits, Monaco has been quite popular, especially in the cocktail circuit.

Parle's, however, derives a major part of its revenues from the low-priced products.

The company has, nevertheless, outpaced the industry growth in step with the

market leader Britannia. Parle Products is setting up a new biscuit manufacturing

unit at Pantnagar, Uttaranchal

Market Segments

Demand - Past & Future

Year Th MT

2000-01 1110

2001-02 1188

2002-03 1307

2003-04 1444

2004-05 1523

2005-06 1607

2006-07 1696

2007-08 1804

2008-09 1920

2009-10 2043

2014-15 2758

Biscuits Products

Source : Ministry of food processing Industries17

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Market SegmentsMarket Segmentation

Segment Share (%)

Organized 50

Informal 50

North 36

East 19

West 23

South 22

Product Variation

Segment Share (%)

Glucose 60

Milk 10

Marie 10

Cream 5

Crackers 7

Others 8

Leading Brands Britannia Modern Bakeman Sujana Premium Bake Whyte Kollar Ovenfresh Premium Bake Gardemaare the leading brands in biscuits.

Britania Industries has made an investment of Rs 600 million for its capacity expansion project at Pantnagar. Parle is

the second largest producer of biscuits in the organised sector. In the popular brands segment, its Parle G remains a

popular brand in the glucose biscuit segment. In the premium segment, its Hide and Seek is attracting

competition due to the sway it holds in the market place. In the saltish biscuits, Monaco has been quite popular,

especially in the cocktail circuit. Parle's, however, derives a major part of its revenues from the low-priced products.

The company has, nevertheless, outpaced the industry growth in step with the market leader Britannia. Parle Products

is setting up a new biscuit manufacturing unit at Pantnagar, Uttaranchal.

Priya Food Products set up with an investment of Rs 26 mn had a capacity to produce 5 tonnes of biscuits per day. In

the past near two decades, it has come a long way and today commands a significant share of the biscuit market.18

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Cakes & pastriesCakes are the largest segment accounting for c. 90% of this market. Key player in this segment include large national

players with packaged sliced cakes and regional players with freshly baked artisanal cakes. The pastries segment is

fragmented with presence of regional artisanal players

Overview:

• The cakes and pastries segment has been growing at a CAGR of 10 – 11% during CY05 – 10. Cakes are the largest segment accounting for 89% while pastries account for 11% of this market.

• Going forward, the cakes segment is expected to grow at a CAGR of 11% over the next five years to reach a market size of c.€390 million. The pastries segment is expected to grow faster at a 13% CAGR to reach a market size of c. €51 million.

Competitive landscape:

• Key players in the cakes segment include Monginis and Britannia. Most of the branded companies sell packaged sliced cakes and not freshly baked cakes.

• Artisanal cakes (freshly basked cakes sold at the production site) account for c. 40% of the market. This segment is dominated by regional chains.

• The pastries segment is dominated by the regional artisanal segment with a share of 90%. Expansion of chained boutique bakery specialists such as Devil’s Workshop, Sugar & Spice, etc. in more cities is expected to drive growth in this segment.

Trends:

• Single portion cakes continued to dominate packaged/industrial cakes with 93% of value sales in 2010 due to their affordability, availability and convenience. However, sales of multi-portion cakes are also increasing as a result of higher spending power.

Market Segments

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