India Calling China.pdf

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India Calling

India-ChinaBusiness Investment

Opportunities

kpmg.com/in


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2013KPMG,anIndianRegiste

redPartnershipandamemberfrmotheKPMGnetworkoindependentmemberfrmsafliated

withKPMGInternationalCooperative(KPMGInternational),aSwissentity.

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01 India Calling: India-China Business

Investment Opportunities


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Foreword


redPartnershipandamemberfrmo

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02

This Knowledge Paper, prepared by KPMG,for IMCs annual flagship event IndiaCalling which is being held this year inShanghai and Guangzhou from April 7-12,2013.

India and China share many commonalitiesand are ranked among the key emergingmarket economies of the world today. It istherefore, fitting, that our strategic trade andbilateral relationships reflect our commoninterests and aspirations, and thus help toleverage the full potential of the multifaceted

historical bonds that bind our two countries.

India-China bilateral trade is expected totouch the landmark figure of USD 100 billionby 2015. The current trade balance betweenthe two nations stands in favour of China.There is however, still massive potentialwaiting to be tapped in terms of economicand commercial partnerships in a wide rangeof spheres between the two nations.

China is currently trying to wean itseconomy away from its export dependency,stimulating domestic consumption.It certainly has the potential to do so.

Domestic infrastructure development is atthe top of the Governments priority list. Forexample, the Chinese government has plansto double its highspeed rail network (alreadythe largest in the world at over 8,000 km)to about 16,000 km by 2020. China alsoholds the record for fastest passenger trainin the world (486 kmph during a test run fora planned maglev link between Beijing andShanghai). And as with the other cases,China hopes to sell its high-speed trains tothe rest of the world not just developingcountries but even highly technologicallyadvanced places such as California.

There is no doubt that despite currentinternational economic vicissitudes, China isstill in a solid growth phase. The Governmentof China is continually establishing qualityphysical and social infrastructure, therebyproviding golden opportunities to Indianbusinesses to set-up projects there. Inaddition, supply of goods and servicesfor large Chinese population that nowpossessed an increasingly large purchasingpower, adds to opportunities for India.

This India Calling Conference is the twelfthin the row of a series of such annual events

organized by the IMC. Our symposiumsin China comprise a galaxy of eminentspeakers and delegates from both countries.The event would help to provide an excellentinteractive platform and networkingopportunities for enhancing trade andbusiness development prospects in bothcountries.

We are certain that this India CallingConference to China will also meet withthe same success and appreciation asits predecessor events have. There are

still many areas of potential cooperationbetween Indian and Chinese businesseswhich need to be clearly identified, forbuilding an all-round mutually beneficialbusiness partnership between our twocountries. This mega event is a key step inthat direction.

IMC and KPMG are committed to promotethe relationship, co-operation and businessbetween India and China.

Niranjan HiranandaniPresident

IMC

Richard RekhyChie Executive Ofcer

KPMG in India

India Calling: India-China Business



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Table of

Contents




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04

1. Executive summary

2. India and China: Worlds leading growth economies

3. Comparative overview

Labour productivity

Capital stock

Debt scenario

Exchange rate

4. Bilateral trade and investment

5. Sector synopsis

Agriculture & Food processing

Asset management

Banking

Education

Electronics & IT

Infrastructure & Construction

Pharmaceuticals

Textiles & Apparels

Transportation & Logistics

6. Business opportunities

7. Conclusion

8. Doing Business in India

9. Doing Business in China

10. About KPMG in India

11. About IMC

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Executive

summary




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Executive summary

The last two decades witnessed theentry of emerging economies on theworld stage in all spheres. Growth inthe world economy has shifted fromdeveloped to emerging countries withIndia and China being at the forefrontof this change. During 1991-2010,while the world economy grew at anaverage growth rate of 2.7 percentonly, China and India grew at anaverage growth rate of 10.5 percentand 6.5 percent respectively thusbeing the epicentres for growth ofglobal economy1 despite the Globaleconomic crisis.

China and India could stay afloatamidst global crisis due to the inherentstrengths of the two countries, suchas large insatiable domestic marketsrising middle class population,high investments, and facilitativeregulations. Further, to sustain thegrowth, the two nations are focusingon multi-barrel growth engines,such as infrastructure development,increasing domestic production andconsumption among others. But thissheer pace of growth in both thecountries presents inevitable need forinputs and thus, trade.

China realized the increasing need ofinputs and thus not only invested indomestic strategy projects but alsoexpanded the horizon to South EastAsia and parts of Africa, in addition topositioning itself as a preferred tradepartner with US, EU and Japan. Indiahas robust plans for South Asia, SouthEast Asia and significantly is pursuingopportunities in US, EU. The fact thatIndia and China account for morethan 10 percent of world exports andmore than 43 percent of emergingand developing economies exports2elucidates the plans of India and Chinato transform themselves in to worldtrading power houses.

However, the bilateral trade betweenboth the countries remains the focalpoint of debates and discussions. Withcombined global trade of ~USD 4.6trilion (2012 estimates), the share ofbilateral trade is certainly the area ofimprovement.

China and India in the recent years witnessed revolutionsin transport, telecommunications, technology andinfrastructure sectors . In addition, both the countriespossess complementary strengths to facilitate mutualtrade and present strong mutual business opportunities.

The Governments of both the nations realized that timehas come to leverage the respective broad industrial basesand resource endowments to gain competitive advantage.

Continuous economic dialogue, formation of workinggroups in areas such as infrastructure, energy, technologyetc. and relaxation of FDI policies in some sectors aresteps in that direction.

*India the trade data is for FY 2012Source: Ministry of Commerce and Industry, Government of India and National Bureau of Statistics,China

*China the trade data is for CY 2012Source: Ministry of Commerce and Industry, Government of India and National Bureau of Statistics,China

Indias global trade (USD billion*)

Trade with China:

9.5% of total trade

Trade with India:

~2% of total trade

Chinas global trade (USD billion*)

795.3 3,866.7

06India Calling: India-China Business


01. World Development Indicators, February 2013, World Bank

02. World Economic Outlook, October 2012, International Monetary Fund


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Twelfth five year plan

Source: Government of India; Government of China (2011 documents)

Particulars India China

Period 2013-2017 2011-2015

Major goals Faster growth

Sustainable growth

Inclusive growth

Higher quality growth

Long-term prosperity

Inclusive growth

Challenges Depletion of energy and water resources

Higher energy use

Resource depletion

Intensive energy use

Increased pollution

Areas ofemphasis

Introduction of crucial reforms

Infrastructure development

Increased participation of private sector

Reduction in inequality and poverty

Conservation of energy and water resources

Enhancing managerial and labour skills

Support farm sector growth

Increased urbanization

Enabling institutions for MSMEs

Sustainable growth

Transition to domestic consumption over exports

Reducing disparities

Energy efficiency

Environmental protection

Scientific development

Development of western region

Increased urbanisation

Key economic

targets

Annual GDP growth: 9-9.5 percent

Annual inflation rate: 4.5-5.5 percent

Annual GDP growth: 7 percent

Annual inflation rate: 4 percent or less

Share of services in GDP (percent): Increase to 47percent from 43 percent

Priorityindustries

Employment generation (Textiles & garments;leather and footwear; gems and jewellery;handlooms and handicrafts)

Technology deepening manufacturing (machinetools; IT hardware and electronics)

Strategic security (aerospace; telecommunications;shipping; defence equipment)

Competitive advantage (automotive; pharma)

Biotechnology (drugs and medical devices)

IT (broadband network, network convergence,internet security infrastructure)

High-end manufacturing (aerospace and telecomequipment)

New energy (nuclear, wind, solar)

Energy conservation and environmental protection

Clean energy vehicles New materials (high-end semiconductors)

Socialinfrastructure

Improved literacy Increase high school enrollment ratio to 87 percentfrom 82.5 percent

Currently, China and India collaboratethe most in IT-Electronics sectors.China presents itself as a goodlocation for business for Indian ITcompanies, while India, presentsa great opportunity for Chineseinnovation and precision in electronics

and consumer durables.

In addition, Infrastructuredevelopment, Farm machinery,Transport & Logistics are witnessingincreased cross border investments.Recent policies in China that aimto boost West and Central regionsthrough heavy investments ininfrastructure, transport & logistics,

agriculture and food processingpresent critical opportunities for Indiancompanies.

However, important areasof collaboration which areunderleveraged include the financial

and banking sectors. With the growthand development of tier two citiesin both India and China, need forrapid urbanization amidst increasingdisposable incomes present vitalopportunities for two countries tocollaborate and strengthen the nervecentres of economy.

The opportunities for businessinvestments are almost self-evidentand tangible, they are there primarilyfor the bold, the agile and the swift.The opportunities can be tappedthrough economic cooperation,mutual dialogue, constructive trade

agreements, and increased mergersand acquisitions (M&A) among others.

Given the opportunities, and dynamicsof contemporary global economy,its time that two countries respecteach others competitive advantage,leverage synergies and pave the wayto sustain their position as worldsleading growth economies.


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India andChina

Worlds leading growtheconomies




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India and China are considered asthe new world growth centers,given their high growth rates ofmore than 8 percent and 10 percent,respectively, in the recent past. Suchhigh economic growth has attractedboth the global investors and globalinstitutions alike.

While India recorded a strongdecadal growth of 7.6 percent during2001-2010, China grew at an evenhigher rate of 10.5 percent. Thoughgrowth slowed down during theglobal financial crisis in 2008, both

economies were quick to recover.

Post crisis, while the world economyhas been pushed into a slow lane,including India and China, the twocountries are still growing at higherrates and have been projected to clockaverage growth rates of 6.6 percentand 8.2 percent respectively during2011-2015. These rates are closer totheir previous decadal growth rates.

India and China:

Leading growth economies in the world

Despite the current slowdown,India and China continue tomaintain their attractivenesssupported by a host of factorssuch as strong servicessector and domestic demand,huge investments, a largeworking age population base,developing infrastructure andabove all policy support.

Source: Economist Intelligence Unit; KPMG in India Analysis

Annual GDP growth (y-o-y, %)




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High share of services

sector

In the past decade, GDP of Indiaand China witnessed a shift in theircomposition in favor of services and

away from agriculture. In case ofIndia, the contribution of servicesincreased from 51.8 percent in 2001to 58.4 percent in 2012, whereas, thecontribution of agriculture declinedto 14.1 percent in 2012 from 23percent in 2001. This shift has provedbeneficial for India as the services hasbeen growing at a much faster rate,compared to agriculture and industrythat took a beating owing to poormonsoon, high interest rates and highcommodity prices respectively.

Although the GDP composition ofChina also witnessed a similar shiftin favor of services, the shift has notbeen very sharp owing to a strongmanufacturing sector.

Higher share of the manufacturingsector places China in anadvantageous position over India asthe value addition and contributionto GDP is much higher. Even factorssuch as economies of scale, lowerborrowing and labor cost further addto the benefits.

Domestic consumption in India

accounts for nearly 70 percentof the GDP, underlying the lowerdependence on external demand.Positively, this has insulated the Indianeconomy from global slowdown tosome extent. On the other hand,increased domestic dependenceimplies lower world integrationand greater negative impact of anincreased tax rate, higher inflation andhigher interest rates.

Source: World Development Indicators, The World Bank, February 2013; Press Note on Revise d Estimates of Annual National Income,Central Statistics Office, Government of India, Various issues

Changing sectoral composition of Indias GDP (%)

Source: World Development Indicators, The World Bank, February 2013; China Sta tistical Yearbook 2012, National Bureau ofStatistics of China


Changing sectoral composition of Chinas GDP (%)

Indias GDP break-up from expenditure perspective (%)




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A large working age population base

Though India had the lowestpercentage of working age population/labor force (15-64 years) of 65.2percent in 2012 among the BRICGroup, it has been estimated to end2050 with the highest percentage of65.5 percent. Though this increase

is miniscule, it is important as theworking age population in othercountries will fall substantially.This rise in working age populationis expected ensure reaping theadvantages of demographic dividend.However, this will happen only whenincreased education is provided,adequate employment opportunitiesare created and the economic growthalso continues to rise. Else, the samepopulation could adversely impacteconomy.

China on the other hand, had 73.5

percent of its population in theworkforce in 2012. Going forward,though its workforce has beenprojected to decline to about 60percent by 2050, it will still have morethan half its population in the workingage.

It is also estimated that the averageage in India by the same time will be29 years as against 40 years in theUS, 46 years in Japan and 47 years inEurope1.





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On the other hand, domesticconsumption in China accounts forabout 50 percent of GDP, followed

by investment with a share of 45percent. This increased share ofinvestment reduces risks from higherinflation but raises risks of higherinterest rates.


Chinas GDP break-up from expenditure perspective (%)

Source: International Database, United States Census Bureau, accessed in March 2013

01. http://newindianexpress.com/education/edex/article1465055.ece

Working age population as % of total population



The International Labour

Organisation has predicted

that India will have 116

million workers in the age

group of 20 to 24 years,as compared to Chinas 94

million by 2020. This fact

is likely to be the prime

competitive advantage of

India in the coming years.


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The two countries have already

started working towards the end,

visible through their increased

financial and policy support.




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Ranking on quality of infrastructure

Source: Global Competit iveness Report 2012-13, World Economic Forum

Note: Ranking out of 144 countries

Indicator China India

Quality of overall infrastructure 69 87

Quality of roads 54 86

Quality of railroad infrastructure 22 27

Quality of port infrastructure 59 80

Quality of air transport infrastructure 70 68

Quality of electricity supply 59 110

Performance of India and China in social infrastructure

Source: Global Competit iveness Report, 2012-13 and 2011-12Note: Ranking out of 144 countr ies in 2013 and out of 142 countries in 2012

Parameters India China

Rank in 2012 Rank in 2013 Change in rank Rank in 2012 Rank in 2013 Change in rank

Health and primary education 101 101 32 35

Higher education and training 87 86 58 62

Developing infrastructure

Physical infrastructureIn case of infrastructure, bothcountries are focusing ondevelopment of the same. As per

Global Competitiveness Report2012-13, published by WorldEconomic Forum, China ranks 69out of 144 countries in the qualityof infrastructure which in itself is apositive indication of the infrastructurein the country. This is the result of theGovernment of Chinas consistentefforts to boost growth, which isalso visible from its emphasis in the12th Five Year Plan (2011-2015). For

instance, it plans to invest RMB 11.1trillion in power industry over thenext 10 years and RMB 400 billion

annually in rail network. It also plansto extend the countrys highwaynetwork to 83,000 km and building anew airport in Beijing. On the otherhand, the Government of India plansto invest USD 1 trillion. during the XIIPlan period. The opportunities for theprivate sector will be in projects suchas power, metro-rail, roads, airportsetc.

Overall, Chinese physicalinfrastructure is better due toincreased spending on the same. The

countrys infrastructure investment is31.3 times (at USD 3,228 billion) largerthan Indias infrastructure investment.Likewise, its logistics investmentis also 13.5 times (at USD 1,241billion) higher than Indias logisticsinvestment.

Social infrastructureSocial infrastructure such as health,education and technical skills playan important role for a country inreaping demographic dividends.These parameters become even moreimportant for countries like India andChina that have the worlds most

populous countries. According tothe Global Competitiveness Report,2012-2013 and 2011-2012, India hasperformed marginally better in highereducation and technical skills in 2013,while maintaining a status-quo inhealth and primary education. On the

other hand, Chinas performance inboth parameters was marginally lowerin 2013 compared to 2012. Positively,China scores above the average inhealth and primary education.




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Performance of India and China in governance

Source: Global Competi tiveness Report, 2012-13 and 2011-12Note: Ranking out of 144 count ries in 2013 and out of 142 countries i n 2012

Governance and policy support

GovernanceGovernance plays an important rolein determining business activityand investment inflow, among

other factors. Areas such as fairand transparent procedures forformulating policies and regulationsand implementation process, along

with autonomous judiciary are someimportant aspects of governance thatshape-up the business and investor

sentiment. The adverse impact offall in the ranking of both countries ingovernance parameters was visible inpoor business and investor sentiment.

14

02. Macroeconomic and Monetary Developments, The Reserve

Bank of India, Various issues

03. Latest numbers add to recovery hopes, 9 November 2012,

http://www.bbc.co.uk/news/business-20263978)



Transparency of governmentpolicy making

58 65 41 51

Burden of governmentregulation

96 98 21 23

Wastefulness of governmentspending

55 63 30 39

Irregular payments and bribes 95 99 63 67

In order to improve the overallsentiment in the economy and

given the increasing scrutiny fromregulators, media and even investors,

there is greater desire to improvecorporate governance and become

more transparent. This is in addition toconducive policy measures.

Monetary policy: Both the ReserveBank of India and the PeoplesBank of China (PBoC) have adoptedexpansionary monetary policiesresulting in lower interest rates, inthe recent past. Though the timing ofreduction in interest rates may havediffered, it is expected to facilitateinvestment and support growth. TheRBI reduced repo rate by 100 basispoints to 7.5 percent. This has beenbrought about by 13 policy rate hikes

during March 2010-March 20122.

The PBoC also slashed interest ratestwice between June-November2012 and also lowered the amountof money banks need to keep inreserves3.

Fiscal policy: In the recentlyannounced Union Budget, 2013-2014, the Government of India (GoI)announced several policy measuresto aid agricultural growth, boostinfrastructure, stimulate investment,fiscal consolidation etc. etc. with anaim to raise GDP growth. Besides,several measures were announcedto achieve the objective of inclusivegrowth. These include higherallocations for education, healthcare,

rural development and humandevelopment.



Policy support

Given the global slowdown, thegovernments and central banks ofboth the countries have been lendingtheir support to boost growth.


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Reforms and other measures byIndia: The GoI along with treadingthe path of fiscal consolidation,announced several other measuressince September 2012 to reviveinvestor and business sentiment.Some of these measures include:

Hike in price of petrol and diesel;cap on the number of subsidizedLPG (cooking gas) cylinders andintroduction of direct cash transfer

scheme. The move will not onlyhelp reduce fiscal deficit but willalso align product prices to themarket. Further, the Direct CashTransfer Scheme, by its very natureis believed to pass on the benefitsto poor and help reduce theinequality gap in a poverty struckcountry5.

Approval of disinvestment in publicsector undertakings (PSUs) willhelp boost government finances,encourage financial investment and

improve operational performanceof the units6.

Relaxation in maximum investiblecaps for foreign investors in sectorssuch as aviation, broadcasting,insurance, pension and retail. Thiswill facilitate increased foreigninvestment, improve access toadvance technology and generateemployment7.

Amendment in Forward Contracts(Regulation) Bill to permit higherinstitutional investment8.

Relaxation of norms for foreign non-bank finance companies (NBFCs)in specified activities in order toincrease funds inflow by enablingdiversification of business9.

Postponement of GeneralAnti-Avoidance Rule (GAAR)implementation to 201610.

Additionally, the Government hasallowed real estate developersto raise external commercialborrowings for development ofaffordable housing11.

The central government isplanning to introduce SingleWindow Clearance mechanismfor improving transparency andexpediting foreign investmentproposals12.

Additionally, the FM undertookseveral road-shows globally toattract foreign investment in thecountry.

The performance of BIMARUstates (Bihar, Madhya Pradesh,Rajasthan and Uttar Pradesh) thathave been growth laggards foryears together. Positively, MadhyaPradesh and Bihar have grown atmore than the national average,thereby imparting strength to thethe Indian economy13.

Source: Union Budget 2013-14, Government of India

GoIs measures to boost growth

Objective Measures

Increase agricultural production Continuation of interest subvention scheme for short-term crop loans

An equity grant of INR1 million per registered Farmer Producer Organization (FPO) has beenpermitted to provide working capital.

Encourage savings Deduction of INR0.1 million to an individual taking a home loan in 2013-14

Inflation protected saving instruments to be introduced.

Boost investment Investment allowance of 15 percent to companies investing INR1 billion in plant and machineryduring 1 April 2013 to 31 March 2015.

Support infrastructure development Issue of tax free infrastructure bonds worth INR 500 billion in 2013-14

Increase the funds pool of Rural Infrastructure Development Fund to INR200 billion

Build 3,000 km of road network

Two new ports to be developed with a capacity of 100 million tonnes

Further, the government is incentivising coastal waterways that will bring multiple benefits for

the economy (lower transportation time and cost being key among other factors).

Increased fuel availability Policy on shale gas exploration and production to be announced soon.

To encourage MSMEs Refinancing capacity of SIDBI increased to INR100 billion (The move is important as 17 percentof Indias GDP is contributed by the SMEs)4.

Foreign trade To announce measures to boost export of goods and services.

Capital market FIIs will be permitted to participate in exchange traded currency derivatives.

Renewable energy Provision of Generation-based incentives for wind energy.

Aviation sector Concession to aircraft maintenance, repair and overhaul (MRO) division.

Goods and Service Tax (GST) Work on GST to be taken forward.

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04. India GDP 2020: SME to chip in 22%, The Indian Express, 25

November 2011 (www.indianexpress.com/news/india-gdp-

2020-sme-to...-/880468)

05. Diesel price hiked by Rs 5/litre; petrol, kerosene spared,

The Economic Times, 13 September 2012; Premium petrol,

diesel, prices hiked, The Financial Express, 16 Septembe r

2012; Customers to get 3 subsidised LPG cylinders in next 6

months, Hindustan Times, 13 October 2012; India roll s out

cash transfer scheme for poor, BBC News India, 1 January

2013

06. Government announces big bang economic reforms:

Highlights, The Economic Times, 14 September 2012

07. FDI in multi-brand retail, aviati on, 4 PSU sell-offs okayed,

moneycontrol.com, 17 September 2012

08. Cabinet approves Forward Contract Regulation Act Bill, The

Economic Times, 4 October 2012

09. Relaxation of NBFC Norms, Press Information Bureau,

Government of India, 5 September 2012

10. GAAR deferred by 2 yrs, Business Standard, 15 January

2013

11. RBI allows USD 1 bn ECB for promoting low-cost housing,

Business Standard, 17 December 2012

12. Raakhi Jagga, Centre to launch single window clearance

system for expor ts, The Indian Express, 8 July 2012; Single

window clearance will be short ly in place: Manish Tewari,

ASSOCHAM, 8 March 2013; Single-window clearance for real

estate proj ects soon, The Financial Express, 25 March 2013

13. Swaminathan S Anklesaria , Lessons in good governance

from former Bimaru states Bihar, Odisha and Chhattisgarh,

18 March 2013




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16

Country/Region IMF World Bank GoI

2013 2014 2013 2014 2013 2014

India 5.9 6.4 6.1 6.8 5.0 6.1-6.7

China 8.2 8.5 8.4 8.0 - -

World 3.5 4.1 2.4 3.1 - -

Other measures by China: Since1980, China has implemented an opendoor policy aimed at attracting foreigninvestment. It further liberalized itseconomy in 2001 with the removal ofrestriction on foreign investment in thetertiary sectors, such as banking and

finance, and accountancy and legalservices.

Investment in certain industriesrequires approval from centralgovernment authorities, such as theMinistry of Commerce. However,an investment of less than USD 300million can be approved by provincial,regional and municipal governments.Some investment projects, whichare above USD 300 million but do notrequire overall state planning control,can also be approved at the local level.

Chinese Government has extendedequal tax treatment to all enterprises,whether foreign or domestic. Newconcessions have been introducedin high technology industries toencourage technological development.

China has introduced a framework ofcommercial law to encourage foreigninvestment. At provincial, regional andmunicipal levels, regulations also existto meet this objective.

In 2011, China introduced its 12thFive Year Plan and is expected to

boost domestic consumption,improving living standards, develop

western and central regions andprotect the environment14.

The plan identifies seven strategicindustries which are expected tobenefit from special incentive andfunding:

Energy conservation andenvironment protection

Next Generation IT

Biotechnology

High-end equipment manufacturing

New energy

New Materials

Clean energy vehicles

Consistent with these priorities,some sectors are likely to witness a

more open investment environment,whereas others particularly heavilypolluting industries are expected tobecome more restricted.

To bolster economic growth, theGovernment of China announced thefollowing measures:

It approved 60 infrastructureprojects worth USD 157 billion,which is estimated to beapproximately 25 percent ofthe size of stimulus packageannounced by the government

during financial crisis of 200815

.

The Government is consideringchanging its growth model andmaking it more dependent ondomestic demand. Thus, it hasalso asked companies to increasewages16.

Some of the measures taken toincrease exports (and in turn boosteconomic growth) include thegrant of more loans to exporters,expediting tax rebates to exporters,urging banks to increase tradefinancing to micro and small firmsraising export credit insurance forsmall companies and encourageimport of machinery andtechnology17.

In order to support the SMEs thatcontribute more than 60 percentto GDP, the Government of China

is considering an industrial fund tofacilitate financing18.

In order to support its photovoltaicindustry that is suffering fromexcess capacity and obstaclesin overseas expansion, theGovernment announcedaccelerating technologicalimprovement and encouragingmergers and acquisitions to phaseout obsolete technology. It is alsolooking at ways to encouragecoordination between powergenerators and on-grid serviceproviders. The Government is alsolooking at allowing greater marketautonomy19.

These policy measures underline thecommitment of both the economiesto revive economic growth.

In light of the above, growthprojections by various agencies revealan optimistic picture in the near future.

Source: World Economic Outlook, The International Monetary Fund, January 2013; Global Economic Prospects, The World Bank, January2013; Economic Survey, 2012-13, Government of India

The gains could beexponential throughmutual collaborationand learning from eachother to sustain highgrowth.

To conclude, the mutual trade giventhe complimentary production patternwill faciliate production in the twocountries. The gains from mutualtrade can be used for increasing theirshare in regional trade.

Importantly, the policy makers inboth the countries need to followan inclusive approach to growth forgreater benefits to all. This wouldinclude special emphasis on socialinfrastructure and a fair governancemechanism.

14. Investment in Peoples Republic of China, KPMG, 2012

15. Pete Sweeney and Langi Chiang, China approves USD

157-billion infrastructure spending, 7 September 2012

16. Joe McDonald, China plans for slower, consumer driven

growth, 5 March (http://bigstory.ap.org/article/ china-plans-

slower-consumer-driven-growth)

17. China announces measures to prop up exports amid slowing

growth, Caijing.com.cn (http://english.ca ijing.com.cn/2012-09-13/112124439.html))

18. Development of SMEs, The Financial Exporess (http://

www.thefinancialexpress-bd.com/more.php?news_

id=95113&date=2012-01-20); Zhang Jianming and Lei Qi,

New measures to support SMEs, China Daily, 11 December

2012 (http://www.chinadaily.com.cn/cndy/2012-12/11/

content_16004548.htm)

19. Chinese govt announces measures to boost PV industry, 20

December 2012, http://news.xinhuanet.com/english/china/2012-

12/20/c_124120198.htm)

GDP growth projections (%)




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Comparative overview




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17

Growth of real capital stock (%)

Total factor productivity growth (%)

Labor productivity growth (%)

Growth of real GDP per head (% per annum)

China fared better than India didin terms of the growth of realstock of fixed assets (machinery& equipment, buildings, etc.),mainly due to its ability to attractinvestments and efficientlychannelize it to the real sector.

A consistently higher growth inlabor productivity in China hashelped it reap the benefit ofhigh investments, maintain itscompetitive edge in internationalmarkets and hence increaseexports. While in India, the growthin labor productivity has been

subdued and fluctuating during thepast decade.

China witnessed a higher growthin total factor productivity, the part

of economic output growth notaccounted for by the growth ininputs (labor and capital), resultingin a proportionate higher increasein GDP per head.

Labor productivity and capital stock








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18

China witnessed higher increasein per unit labor cost during thelast decade as compared to thatexperienced by India. One ofthe key reasons for this couldbe increasing labor demandas compared to an increasing

supply of labor on the back ofdeclining demographic dividend.The working age population inthe country declined by almost3.5 million in 2012. Continuationof this trend could underminethe competitiveness of Chinesemanufacturing sector20.

China fares better than Indiain terms of various ratios ondebt. Its debt/GDP ratio of 9.5percent is far better than Indias18.0 percent in 2011 indicatinga much less reliance on externaldebt. Low level of debt alsoputs less strain on the ChineseGovernments finances and allowsmore expenditure on promotingbusiness.

Exchange Rate Comparison Indian currency, which follows

a free float, has depreciatedsignificantly as compared to the USdollar during the post crisis period.

On the other hand, Chinesecurrency, which follows a managedfloat, has appreciated duringthe same time period helping itcorrect the trade imbalance that

it has developed over the years.The managed float has been amechanism for boosting exports,which has been its key growthmodel.

Source: Economist Intelligence Unit; KPMG in India analysis

Unit labor costs (% change per annum)

Debt Scenario

Comparison

Average exchange rate (INR/USD ) Average exchange rate (RMD/USD )

Source: Economist Intelligence Unit; KPMG in India Analysis Source: Economist Intelligence Unit; KPMG in India Analysis

Debt scenario (2011)

Source: Economist Intelligence Unit and KPMG in India Analysis

20. Deutsche Bank Research (http://www.dbresearch.com/servlet /reweb2.ReWEB?rws ite=DBR_

INTERNET_EN-PROD&rwobj=ReDisplay.Start.class&document=PROD0000000000302673&r

wdspl=1)




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Chinas share inIndian trade hasincreased, but it hasthe potential to risefurther

Bilateral trade has been one of the keyfocus areas for both the Governmentof India (GoI) and the Government ofChina. Concentrated policy effortshave resulted in higher trade andforeign investment between the twocountries. The total trade betweenIndia and China has increased at aCAGR of 37.4 percent exponentially

during FY01-FY12.

Bilateral trade and investment

Chinas share in Indias trade hasmore than trebled from 2.5 percent inFY01 to 8.9 percent in FY13 (April-December). Likewise, Indias sharein Chinese trade has also more thandoubled from 0.7 percent in 2001 to 2percent in 2011.

However, given the large trade

pie in each country and the

small trade shares accounted

by India and China, highlights

the potential for a much larger

bilateral trade.

This can be achieved throughconstructive agreements like theComprehensive Economic PartnershipAgreement (CEPA) or the Free TradeAgreements (FTAs) that cover bothgoods and services.

According to Dr Arvind Virmanis(former Chief Economic Advisor tothe Government of India) analysis in2005, The bilateral trade potentialis very high, given the size anddynamism of the two economies andtheir complementary production andtrading patterns. The main barriersto realising the full potential ofChina-India trade, including customsrules and procedures, certification

and regulatory practices, non-tariffbarriers, and rules of origin thatneed to be addressed. Thus, the twocountries have to make a trade-off.While India tends to gain in services,China tends to gain in manufacturing.

Another important area is that thiseconomic cooperation between thetwo countries should be embeddedin Asian growth. Since the twocountries are driving production andconsumption at home, the same couldbe a source of trade with other Asiancountries.

Source: Export Import Data Bank, Ministry of Commerce and Industry, Government of India

Total Bilateral trade between India and China

Chinas increasing share in Indian trade (%) Indias increasing share in Chinese trade (%)

Source: Export Import Data Bank, Ministry of Commerce, Government of India; National Bureau ofStatistics, China

Source: Export Import Data Bank, Ministry of Commerce, Government of India; National Bureau ofStatistics, China




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The bilateral trade between the twocountries is skewed in favor of Chinathat has a positive trade balance with

India.

Source: Export Import Data Bank, Ministry of Commerce, Government of India

Indias trade balance with China

India: attractive destination for foreign direct

investors

Indias attractiveness as an investmentdestination is visible from the averagenet inflow that more than trebled toUSD 13.6 billion during 2006-2011from an average net inflow of USD3.8 billion during 2001-2005. This has

been enabled by higher economicgrowth, rising demand, lower laborcost and some government support.Going forward, the average net inflowhas been projected to rise to USD 22billion by the end of 2015.

Source: Economist Intelligence Unit, EIU country data accessed on 13 March 2013; KPMG in India Analysis

Year-wise FDI inflow in India (USD billion)




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21

Services sector continues to maintain its lead

over other sectors in FDI inflows

On a cumulative basis (April2000-December 2012), the servicessector surpassed all other sectors

with an investment inflow in excessof USD 36 billion, followed by theconstruction sector with an inflowof approximately USD 22 billion. Thishas been facilitated due to increasingpotential of the sector and hasalso been reflected in the sectorscontribution of GDP. The inflow inconstruction has been aided given therising need to develop infrastructureand housing in the country. Hotel andTourism, though the least attractivesector on cumulative basis, attractedthe second highest inflow in 2012(April-December).

Source: Ministry of Commerce and Industry, Government of India and KPMG in India AnalysisNotes: Construction includes township, housing, built-up infrastructure Services sector includes financial and non-financial

China surpasses India in its attractiveness as a FDI destination

During 2001-2005, China attracted

FDI worth 15 times the FDI attractedby India, enabled by higher economicgrowth and economies of scale.

Thus, its average pool of inflow morethan doubled during 2006-2010.However, India seems to be giving

tough competition as Chinas FDI

inflow reduced to almost 9 timesIndias FDI in the period. Goingforward, Chinas average FDI inflowis projected to be less than 5 timesIndias average FDI inflow during 2011-2015.

In absolute terms, the gap between

FDI inflow in China and India isexpected to reduce to about USD 82billion during 2011-2015 from a gap ofUSD 108 billion during 2006-2010.


Year-wise FDI inflow in China (USD billion)

Sector-wise FDI inflow in India (USD million)




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Manufacturing sector surpasses all others

The manufacturing surpasses all othersectors with a share of 45 percentin total FDI inflow. It is followed bythe real estate that has a share of23 percent. Thus, the two sectorstogether account for close to 70percent of the total foreign inflows inthe country.

Higher FDI in China as a percentage of GDP

FDI as a percentage of GDP in Indiahas been lower than that in China. Thisis visible from the lower and upperend of the percentage share of thetwo countries. While, FDI accounted

for a small share in India varyingbetween 0.7-3.4 percent during 2001-2012, in China it was comparativelyhigher varying between 2.2-4.6percent. The increased inflow has

been due to higher economic growthof China and in turn facilitated thesame as well.

Source: National Bureau of Statistics, China

Actual FDI (USD million)


FDI as percentage of GDP in India and China (%)




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Targetcompany

Acquirercompany

Industry Year Deal value(USD million)

Deal description

Visteon TYCAuto Lamps

Varroc Group Automotive Mar-12 20.0 Varroc Group, the India-based automotive partsmanufacturer, acquired 50 percent stake in VisteonTYC Auto Lamps Co., Ltd., the China-based lightingdivision of Visteon Corporation which includesincandescent lamps, advanced systems for luxurymodels, and smart systems that integrate predictive

lighting and glare elimination, from VisteonCorporation, the listed US-based automotivecomponents manufacturer Visteon Corporation

Global WindPower

China MingYang WindPower Group

Energy Jul-12 25.0 China Ming Yang Wind Power Group Limited, thelisted China based wind turbine manufacturer,acquired 55 percent stake in Global Wind PowerLtd., the India based manufacturer of renewablewind energy solutions, from Reliance Capital Ltd

Acome XintaiCables Co

MicroqualTechno

Industrial Feb-11 12.0 Microqual Techno, the India based companyengaged in the manufacture, system integration,and service/outsourcing of passive components,acquired Acome Xintai Cables Co., Ltd, the Chinabased company engaged in carrying wiring devices.

YanchengTractorCompany

Mahindra &Mahindra

Automotive Aug-08 28.0 Joint venture with Chinas Yueda Group tomanufacture and sell top-quality tractors in thegrowing Chinese market

ShandongRongan Group

Binani Cement Industrial Aug-07 11.0 Binani Cement, the listed Indian cementmanufacturer, has acquired a 49 percent stakein the clinker manufacturing plant of ShandongRongan Group, the Chinese diversified businessgroup engaged in mining and power generation. Theacquisition is in line with Binanis strategy to sellcement in China, West Asia and in eastern Africa.

KHD HumboldtWedagInternational

McNally BharatEngineering

Company

Industrial Aug-09 16.0 McNally Bharat Engineering, India based companyengaged in providing turnkey solutions, has agreed

to acquire the engineering workshop and coal andmineral technology business of KHD HumboldtWedag International.




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23

Source: Mergermarket; Venture Intelligence; KPMG in India Analysis

M&A/JV deal scenario between India and China

The economies of India and Chinashare strong growth prospects whichhave mutually benefitted companiesin both countries. Indian companieshave benefitted from gaining accessto Chinese markets either throughacquisitions/joint ventures and accessto Chinese technology. Chinesecompanies on the other hand havealso expanded their operations inIndia looking to tap into the Indiaopportunity.

For instance, power equipmentmanufacturing companies of Chinahave been key beneficiaries of theplanned capacity additions in theIndian power sector which has ledto an increased demand for Chineseequipments. Among large players,

Reliance Power has employedequipment for its Sasan Ultra MegaPower Project from Shanghai ElectricCorporation. Chinese companieshave been keen to enter into Indiathrough setting up their own plantsor through a joint venture route to tapthe opportunities in the Indian powersector. Recently, in April 2012, China-based Sinovel, one of the largest windturbine manufacturers in the worldsigned an agreement with GhodawatGroup of Maharashtra to use lattersfacilities to produce turbines in India21.

Besides energy, automotive andindustrial sectors have also attractedM&A and joint venture investmentsenabling market and technologyaccess between both the countries.

Specifically, in December 2009,General Motors (GM) formed a 50-50venture with Shanghai AutomotiveIndustry Corporation of China, whichis the partner of GMs main venturein China to expand their co-operationin Asia. Subsequently, in October2012, GM has increased stake in itsIndian operations to 93 percent bybuying 43 percent from its Chinesepartner Shanghai Automotive IndustryCorporation Group for an undisclosedsum indicating the long term potentialthat GM has in India22. Going forward,with India China bilateral tradetouching USD 75 billion as of 2011-12,one is likely to see increased M&A/JVactivity between the two countries23.

21. Sinovel gets approval to sell wind turbine machines in India, The Business Line, 31 December 2012

22. General Motors stake in Indian arm to 93%, Financial Express, 16 October 2012

23. Trade Statisti cs, Ministry of Commerce and Industry, Government of India




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24

24. The 2nd India-China strategic economic dialogue: outcomes,

South African Foreign Policy Initiative, 27 November 2012

Targetcompany

Acquirercompany

Industry Year Deal value(USD million)

Deal description

TamcoShanghaiSwitchgear

Larsen & ToubroInternationalPZE

Industrial Dec-07 10.0 Larsen & Toubro International PZE (LTI), the Indiabased subsidiary of Larsen & Toubro Limited (L&T),has agreed to acquire Tamco Shanghai Switchgear(TSS), the China based switchgear business ofTamco Corporate Holdings Berhad.

Hubei J ingWei ChemicalFibre

The Aditya BirlaGroup

Industrial Sep-06 67.0 The Aditya Birla Group, acquired 70 percent stakein Hubei Jing Wei Chemical Fibre Company Limited,the China based viscose staple fibre manufacturer.

GeneralMotors India

ShanghaiAutomotiveIndustryCorporation

(Group)

Automotive Dec-09 500.0 Shanghai Automotive Industry Corporation (Group),the China based company engaged in manufacturingand sales in passenger cars, commercial vehiclesand components, has acquired a 50 percent stake in

General Motors India.

GAIL ChinaGas GlobalEnergyHoldings

GAIL (India)Limited; ChinaGas Holdings

Energy Jul-07 NA GAIL, the listed Indian gas transmission andmarketing company and China Gas Holdings Limited,the listed Hong Kong based natural gas servicesoperator, has established a joint venture company.GAIL and China Gas Holdings each will hold 50percent stake each in the company. The business ofthe joint venture will primarily focus on natural gassector projects in China, India and other countries.

Source: Mergermarket; Venture Intelligence; KPMG in India Analysis

India, China on the proposed path of economiccooperation24

India and China foresee strongbusiness opportunities within theirrespective economies. The Indianand the Chinese government areundertaking strategic economicdialogue to improve macro-economicpolicy coordination, promotingexchanges on economic issues andenhancing India-China economiccooperation. Towards this end, thefirst dialogue had been successfullyheld at Beijing in September 2011where the two sides agreed toconstitute five Working Groups onpolicy coordination, infrastructure,energy, environment protection andhigh-technology. A working leveldelegation from China visited NewDelhi in March 2012 following whichthe five Working Groups met inBeijing in the months of August andSeptember 2012.

The proposals and recommendationsmade by the five Working Groupswere considered during the seconddialogue held in November 2012and directions given for their futureactivities. Specifically, the Indian andChinese authorities agreed on thefollowing:

Cooperation at the globallevel:This constitutes reformof international monetary andfinancial systems, stabilizing thevolatility in global commoditymarkets, working towardssustainable development andclimate change goals, and ensuringfood and energy security. Further,cooperation in imparting technicalknowledge to reap the benefits ofa skilled workforce would go a longway in future.

Strengthening communicationon macroeconomic policies: Bothsides agreed to maintain continuedeconomic growth while adjustingmanufacturing and services,upgrading levels of technologiesand skills, while developing thehard and soft infrastructure forencouraging economic growth.The authorities also decided toregularly conduct joint studies onissues of mutual interest, focusingon benefits of best practices andinformation exchanges.




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Deepening and expandingtrade and investment: Bothsides recognized the need toexplore potential synergies inareas where they have mutualcomplementarities, improve tradeand investment environments,

removing market barriers, enhancecooperation in project contracting,deepen business to businessexchanges, improve transportationlinks, encourage greater bilateralinvestment and work towardsachieving a more balanced andsustainable bilateral trade. Thiswill promote companies in bothcountries and enable them to tap/exploit opportunities in relevantmarkets.

Expanding cooperation in thefinancial and infrastructure

sectors: Both the countries agreedto intensify the cooperation in thefinancial sector by encouragingfinancial institutions of the twocountries to set up operationsin either country to supportenterprises of the two countriesto establish/expand commercialoperations. Towards this end,the Reserve Bank of India (RBI)and China Banking RegulatoryCommission (CBRC) have alreadysigned a memorandum ofunderstanding (MoU) to increasebanking and financial cooperationand agreed to grant permission tothe banks of the other country toopen branches and representativeoffices.

Besides, the main outcomes of thefive working groups were as follows:

Policy Coordination WorkingGroup: Both sides discussed planpriorities and the ways and meansof achieving plan targets recentlyunveiled in their 12th Five YearPlans. They exchanged views onskills development and industrial

park development. The two sidesalso submitted assessment reportson the investment environments ineach others country based on theexperiences of the enterprises ofthe two countries and discussedpossible solutions to improve thesame. The two sides have alsoagreed to carry out joint studieson planning cooperation and skillsdevelopment for employability, andentered into related MoUs.

Infrastructure Working Group:It focused on enhancing railway

cooperation; both sides exchangedviews on the broad policies andplans for railway development ineach others country. The two sides

also discussed high-speed raildevelopment programme, heavyhaul and station development andentered into a MoU to exchangeviews and other related informationin these areas. Infrastructurehas also been an area where a

number of Chinese companiesare looking to enter into India. Forinstance, besides power, Chinesecompanies are involved in as manyas six national highway projects inconsortium with Indian partners25.These include projects such asSrinagar-Banihal, Udhampur-Ramban, Jammu-Udhampur andPiprakothi-Motihari-Raxaul indifferent states of India.

Energy Working Group: Bothsides briefed each other onthe development of the power

sector in the two countries, theongoing cooperation in the powerequipment sector, opportunitiesand challenges in the wind energysector, the possibility of Chinesepower equipment manufacturerssetting up service centres in Indiaand relevant policy environment tosupport the ongoing cooperation.Energy has been a high area ofcollaboration amongst Indianand Chinese companies whichhave benefitted from the capacityadditions in the Indian powersector.

Environmental ProtectionWorking Group:The two sidesagreed to enhance cooperationin the implementation of energyefficiency projects through energyservice companies (ESCOs),encouraging visits to industrial andmanufacturing centers excellingin energy efficient initiatives,cooperate and jointly developtesting protocols and standards andhave entered into a related MoU.The two sides also exchangedviews on enhancing cooperation in

water-saving technologies coveringthe areas of waste water recyclingand water-efficient irrigationsystems.

Hi-Technology Working Group:The two sides agreed to enhancecooperation in the IT/ITES domain.Both sides also agreed to carryout/support joint studies to betterunderstand the IT/ITES markets ofeach country and have entered intoa related MoU in this area. The twosides also reached a consensus toexplore the possibility of working

together for developing commonstandards for digital TV, audio andvideo codec standards and mobilecommunication technology. Most

of the leading companies from Indiahave already tested the water inChina. Promising opportunities forthe IT bilateral trade developmenthave resulted in wide presence ofIndian IT Companies in all IT hubsin China. Companies like TCS, NIIT

are adopting aggressive approachand participating in local business,where companies like Wipro andInfosys had made their foot hole forservice of overseas client.

Chinese investments in India aregrowing in a number of diversefields. Most are still in infrastructure,raw materials, and electronics.However, over the past three years,Chinese companies have startedto enter Indias industries such asautomotive, finance and healthcare.For instance, Chinas leading car and

sports utility vehicle maker GreatWall Motor Co (GWM) is planning toenter the Indian market, following thefootsteps of compatriot commercialvehicles manufacturer Beiqi FotonMotor Company (BFMC). GWM islooking for an independent entry inthe Indian market and not throughany joint venture. On the other hand,BFMC has already signed a MoU withthe Maharashtra government to setup a manufacturing plant entailingan investment of around INR 16.7billion over a period of five yearsto produce commercial vehicles,including medium and heavy trucksand passenger carriers26. Theircomparative advantage is their abilityto provide products and services thatsuit Indias market demands and aremore cost-effective than westerncompetitors.

The Indian and Chinese governmentshave set a bilateral trade target ofUSD 100 billion by 201527. As part ofagreement to enhance trade betweenthe two countries, eleven agreementsthat envisage a total investmentof more than USD 5.2 billion were

signed between the governments andbusiness groups of India and Chinaat the second strategic economicdialogue between the two nationsin November 2012. Specifically, USD3 billion financing agreement wassigned between Reliance Powerand Chinas Guangdong MingyangWindpower Group Company andanother USD 800 million agreementbetween NIIT China (Shanghai) andChinas Hainan province to establishan information technology enclavein Hainan28. Domestic companiesin both countries are likely to bekey beneficiaries of the enhancedcooperation and trade linkagesbetween the two countries.

25. Project Monitor, April 2012

26. Chinas SUV maker Great Wall Motor Co looks to enter India,

The Economic Times, 10 December 2012

27. India-China trade expected to touch USD 100 billion by 2015,

The Economic Times, 26 October 2012

25. Milestone, China Ming Yang Wing Power Group

Limited website, http://ir.mywind.com.cn/phoenix.

zhtml?c=238508&p=irol-milestone, accessed on 25 March

2013




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Doing Business RankingEven in doing business, India fallsbehind China with a rank of 132. Thisis because China has introducedimproved investor friendly policies,especially in areas such as registering

a property, trading across borders,enforcing contracts and resolvinginsolvency.

On the other hand, India fares betterin areas such as providing credit andelectricity and protecting investors,

which could be learning areas forChina. Thus, mutual learning can leadto a much improved doing businessclimate in the two countries, resultingin increased investments, access

to improved technology, betteremployment and higher economicgrowth.

Doing Business Indicators

Source: Doing Bus iness 2013, The World BankNote: Ranking out of 185 countries



Overall doing business 132 132 91 91

Starting a business 169 173 153 151

Dealing with constructionpermits

183 182 181 181

Getting electricity 99 105 113 114

Getting credit 23 23 67 70

Protecting investors 46 49 98 100

Paying taxes 149 152 118 122

Trading across borders 125 127 60 68

Enforcing contracts 184 184 20 19

Resolving insolvency 109 116 78 82




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Sectors

synopsis




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Agriculture &Food processing

Sector profile

Parameter India China

Market size

(2011-2012)

Indias Agri-GDP is estimated to be USD 138.6 billion*1

Indias processed food output was valued at USD 93.1billion during FY10 (y-o-y growth of 20 percent)2

Agri-GDP was USD 730 billion3 (10 percent of the USD7.3 trillion Chinese GDP)4in 2011 (5 times that of India)

Food industry output was USD 1.1 trillion in 2011(almost 9 times that of India)5

Food

processing

The unorganized sector accounts for more than 70percent of processed food production by volume and 50percent of production by value6

Food industry is dominated by players (92 percent ofcompanies in 2011) with annual sales less than USD740,0007

Inputs Missing links exist in the seed production system. Thereis very little focus on hybrid seed production and themarket is fragmented

Despite having the second-largest arable land acreagein the world, Indias share of the INR 1.5 trillion globalcrop protection market is only 2-3 percent8

The Chinese seed industry is estimated to be USD 7.7billion and is the second largest after the US. With8,000 companies the market is highly fragmented9

The Chinese market for pesticides is estimated tobe ~USD 6 billion and expected to be the worlds largestmarket by 20169

*Note: INR to USD exchange rate used (2012): USD 0.018754; FY refers to Indian Financial Year i.e. April to March

Source: Infrastructure Development in Agriculture, KPMG in India Analysis

Agri and food business value chain

Exhibit: Tractors per 100 sq km of arable land (#)

01. First Revised Estimates of national income,

consumption expenditure, saving and capital

formation, 2011-12; Government Press Release;

January 2013

02. http://www.cci.in/pdf/surveys_reports/Food-

Processing-Sector-in-India.pdf

03. http://data.worldbank.org/country/china;

04. http://data.worldbank.org/indicator/NV.AGR.

TOTL.ZS

05. USD A Global Agriculture Information Network

Report (China), Feb 2013;

06. Ministry of Good Processing, Annual Report

2010-11

07. USDA Global Agriculture Information Network

Report (China), Feb 2013

08. Infrastructure Development in Agriculture A

KPMG CII report

09. www.chinadaily.cn.com




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Key trends

India China

The private investments in agri and allied

sectors continue to rise

It is widely acknowledged that public investment

in agriculture is critical and important, in actual

terms. Currently the public investment forms

about 20 percent of the total investment while

the 80 percent comes from the private sector10

Significant post harvest losses continue to

plague the agro and food segments in India11

Significant post harvest losses (fruits and

vegetables 5.8-18.0 percent, pulses 3.9-6.0

percent) continue on account of lack of storage

and transport infrastructure, untrained labor and

multiple levels in food value chain

Agri and allied sector in India today is

witnessing the rise of organic foods

Consumer attitudes and preferences are

undergoing a shift towards health consciousness

which led to the emergence of organic food

segment

Exhibit: Level of food processing

Segment India Other countries

Fruits and

Vegetables

2.2% US (65 percent),Philippines (78 percent)China (23 percent);

Marine 26%

60-70 percent in developedcountriesPoultry 6%

Buffalo Meat 20%

Milk 35% 60-75 percent in developedcountries

Source: Infrastructure Development in Agriculture, KPMG in India Analysis

China continues to record increase in food-

grain output thus ensuring the supply side is

in agri-food processing is intact12

China witnessed a record production of 590

million tonnes of food-grain in 2012, growing at

3.2 percent over 2011

Chinese agri and allied sectors is amidst the

increasing labor costs which might deter the

cost competitive advantage in the future13

Low labor costs had been a key competitive

advantage for China. However, farm wages have

been increasing on account of labor migration to

cities (for example, labor costs for cotton farming

increased by 20 percent during 2011)

Currently the food manufacturers in China are

increasingly targeting forward integrationwith an intent to move closer to customers

and thwart supply chain issues

Chinese food manufacturing companies are

currently experiencing issues such as quality

concerns and counterfeit products; this

prompted the food manufacturers to start

retailing and move closer to customers

Emergence of new stricter safety standards

to ensure food quality

Some big Chinese players have reportedly

defaulted on the quality front (ex: incidents

such as food contamination in 2011) leading

to a growing food safety concern amongst

consumers. This has prompted the government

to raise food safety standards.

10. State of Indian Agriculture 2011-12

11. Infrastructure Development in Agriculture, KPMG-CII Report, 2009; State of Indian Agriculture

Report, 2011-12, Ministr y of Agricul ture, Government of India

12. www.china.com.cn/zhibo/zhuanti/ch-xinwen/2013-02/01/content_27858809.htm

13. http://www.bloomberg.com/news/2012-05-25/china-cotton-planting-may-fall-by-10-on-increasing-

labor-costs.html




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Key drivers of growth

India China

Government initiatives tend to liberalize the

sector which are likely to boost investments

in the sector

India has undergone a calibrated liberalization

of trade policy (starting with signing of

ASEAN Trade Goods Agreement in 2009)

Increasing outlay for food processing sector

under the 12th Five Year Plan is USD 2.8 billion

with focus on infrastructure development. Its

more than thrice the budget allocation in the

11th plan

Increasing consumption of high-value food

items:

Per capita consumption and spend on higher

order food items such as meat, fruits and

vegetables have been growing

Growth in organized retail (OR):

OR is expected to grow at a CAGR of 26.4

percent during 2011-2016, and is likely to

continue benefiting the sector14

Chinese government plans to focus onvarious aspects of supply chain to improvethe efficiency and exports in agri and alliedsectors

Budgetary allocation for agriculture increasedto USD 190 billion** in 2012, an increase of17.9 percent over 2011

Focus on farm modernization by promotingresearch in biotechnology, seed productionand effective use of farmland. Governmentsubsidizes inputs such as machinery,fertilizers

Food exports reached USD 50.5 billion andimports were valued at USD 28.8 billion,a y-o-y increase of 23 and 33 percent,respectively; the exports are further expectedto increase

The consumption of high-end food items has

been increasing and expected to drive thefood processing sector

The average per capita consumption of high-endfood items, such as pork and dairy products, hasincreased by 1.85 and 6.8 times, respectively,during 2000-10. Prepared meat and dairy sectorsare amongst the fastest growing food segmentsin China

Increasing number of high-end food retailingstores to bring packaged food closer tocustomers likely to drive the food business inIndia

China witnessed an increase in the number ofoutlets of high-end food retailers, such as Beijing

Hualian Group and Ole, that are likely to driveprocessed and packaged foods more closer toconsumers

Source: www.chinadaily.cn.com/cndy

Exhibit: Per capita consumption of high end food

14. Emerging Trends in Indian Retail and Consumer 2011 - Technopak




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Asset management

Sector profile

India China

Assets under

management(June 2012)

USD 122.6 billion1 USD 382.3 billion2

CAGR

(June 2007 June

2012)

11.4 percent1 6.1 percent2

Key Market Players

Domestic UTI Asset Management

Reliance Capital Asset

SBI Funds Management ICICI Prudential Asset

Birla Sun Life Asset

China AMC

E-Fund

Southern Bosera

GF

Huaan

Foreign HSBC Asset Management

ING Investment Management

Franklin Templeton Asset

Harvest (tie-up between Deutsche Bank and ChinaCredit Trust)

Morgan Stanley Huaxin

Axa Investment Managers

Market structure Market is characterized by 44 asset management

companies (AMCs) as of September 2012

Liquid/money market schemes account for ~90percent of the market.

Highly skewed presence in major cities

The composition of Chinas asset management sector

is as follows: trusts (68 percent); mutual funds (28percent) and others (4 percent)

Trusts, the largest players, have been slow to expandoutside of their core business into asset management

*Percentages in the parenthesis indicate approximate market share as of May 2012 for China

Note: This is an indicative list and not an exhaustive list



01. Market size as of 2Q12; average AUM,

AMFI website, http://www.amfiindia.com/

AUMReport_Frm_Po.aspx?rpt=fwise, accessed

7 March 2013, http://www.z-ben.com/node/453

02. China Financial sector assessme nt programme

IMF,World Bank initiat ive; KPMG Analysis


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Key trends

India China

Sound regulatory environment

Minimum entry and exit loads and a limit on

expenses is a move towards more professional

advice, cost-efficient processes and improved

customer service

Highly skewed geographic distribution

77 percent of distributors are present in top 10

cities by investment in mutual funds3

A slew of reforms after the global financial

crisis slowed the growth of the sector

Revival in economic growth, increased

disposable income and an uptrend in equity

markets are expected to bring the customers

back to mutual funds

International expansion

International expansion has emerged as a key

strategic priority for Chinese fund management

companies (FMCs) with several European

markets being the focus

Supported by the conducive governmentpolicies, Chinese FMCs are leveraging Hong

Kong as a launch pad to seek international

exposure and enhance their brand equity.

Limited product differentiation

Only a few FMCs have individually distinguished

offerings.

Large insurance companies have started

setting up their own FMCs

On the back of the strong growth in insurance

premiums, some of the largest insurers haveestablished their dedicated asset management

subsidiaries not only to manage the funds of the

parent company but also to manage those of

other insurers for a fee.

Distribution is skewed with four large

commercial banks acting as major

distributors



03. Opportunities in the Indian Asset Management Industry,2011 Webinar organized by Australian

Trade commission and E&Y


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India China

Low penetration

As of December 2011, AUM/GDP ratio of

approximately 5 percent as compared to

97 percent, 77 percent, 43 percent and 40

percent for Australia, the US, Canada and Brazil,

respectively.4

Regulatory push to expand to tier 2 to tier 6

areas

Easier norms to enrol new customers through

a variety of distribution channels to help AMCs

serve the rural markets profitably

Improved performance of financial markets

coupled with alternative investment options

to drive the growth

Sound equity market and developing debt

market coupled with a variety of investment

options (private equity, art, derivatives,

commodities, etc.) would drive the growth of the

sector

Institutional investors to drive growth

Chinas major institutional players, with

significant capital, are likely to play a major role

as investors in the Chinese asset management

sector

A large number of small players (insurers,pension funds, etc.) are expected to drive the

market

Increased Liberalization and improving

regulatory environment

Governments proposed legislation to relax

restrictions on the origination and approval of

new funds and allow FMCs to compete for a

bigger share of Chinas wealth management

market, is expected to help FMCs expand their

business

Partnerships with domestic fund managers

Partnering with domestic fund managers to

set up JVs offers huge opportunity to tap the

Chinese market; allows maximum foreign

ownership of 49 percent



04. ICI Factbook 2012, World Economic Outlook database, IMF

Note: GDP/AUM is taken to be total Net Assets/GDP at current prices


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Banking

Sector profile

34

India China

Total assets

(March 2012)

USD 1,601.3 billion1 USD 19,142.3 billion (close to 12 times Indias bankingassets)2

CAGR

(2006 2011)

19.1 percent1 20.8 percent2

Key market players3

Domestic State Bank of India

ICICI Bank

HDFC Bank

Bank of Baroda

Bank of India

Axis Bank

Punjab National Bank

Industrial and Commercial Bank of China

China Construction Bank

Bank of China

Agricultural Bank of China

Bank of Communications

Foreign Standard Chartered Bank

Citi Bank

HSBC Bank

Deutsche Bank

HSBC Holdiings PLC

Standard Chartered PLC

J.P. Morgan Chase & Co

Citigroup Inc.

Market structure Market characterized by a healthy mix of public (~70

percent), private (~22 percent) and foreign (~8 percent)banks with steadily increasing market share of privateand foreign banks

CAs of December 2011, Chinese banking systemis characterized by large commercial banks (~49percent), joint stock commercial banks (~17 percent),city commercial banks (~9 percent), policy banks(~8 percent), rural credit cooperatives and financialinstitutions (~10 percent), rural banks (~4 percent),foreign banks (~2 percent) and rural cooperative banks(~1 percent)

*Percentages in the parenthesis indicate approximate market share of banks as of March 2012 for India and as of December 2011 for China

Chinese banks rank

among the worlds top25 banks. On the otherhand, no Indian bankfeatures in the list.



01. DIPP, RBI

02. Peoples Bank of China (PBC)

03. A Profile of banks, 2011-12, RBI

Note: This is an indicative list and not an exhaustive list


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Key trends

India China

High interest rate and slow economic growth

have impacted the banks business

For the fortnight ending 22 February 2013,

deposit and credit growth decreased to 12.7

percent and 16.3 percent, respectively.4

Increase in banks non performing assets

Increase in banks NPA (especially in case of

public sector banks)

According to the ratings agency CARE, NPAs are

estimated to have increased by 43.1 percent to

INR1.79 trillion during April-December 20124

Emphasis on alternative distribution

channels

Banks are trying a combination of alternative

channels (such as mobile banking, business

correspondents, ATMs, etc.) to serve the areaswith lower penetration of banks

Loans to small and medium enterprises

(SMEs) has become a focus area for banks in

China

All banks in China have begun to focus on loans

to SMEs with joint-stock banks leading the pack.

As of December 2011, loans to SMEs stood

at RMB 10.8 trillion, 19.6 percent of total loan

portfolio of RMB 54.8 trillion.5

Chinese banks are focusing on efforts to

expand their international footprint

Many of the Chinese banks are gradually

accelerating efforts to expand in other

countries through establishing new institutions,

merging and acquiring institutions and forming

partnerships.

Commercial banks have increased their focuson private banking

With Bank of China and Citibank being the

pioneers in private banking, 16 Chinese and

foreign banks opened 150 private banking

institutions in 22 cities in 2011. Total assets under

private banking exceeded RMB 300 billion.5



04. DIPP, RBI

05. China Banking Industry Operation Report (2011), China Banking Regulatory Commission, 15

February 2012 White Paper on Private Wealth Management in China, jointly rel eased by Private

Banking Department of Bank of China and Hurun Report, October 2011


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36


India China

Areas with low or no penetration of banks to

drive the growth of banks business

A large proportion of the population with

increasing income levels and low or no access

to banks, presents huge opportunity for banks

to provide various financial services. Regulatory

and government initiatives such as use of

business correspondents, Aadhar cards and

liberal branch expansion policy in small urban

and rural areas have helped banks expand their

business.

Private banking and wealth management

services to drive the growth of banks

Numbe

Documents

India Calling China.pdf