India InsightsThe Indian economy newsletterDecember 2015

KPMG.com/in

Executive summary

India’s improved brand image

Market Trends

Insights into key government initiatives:

• Real Estate – Neeraj Bansal

• Smart cities – Jaijit Bhattacharya

KPMG in the news

Partner Speak

Our recent publicationsTAB

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1. India among top 10 countries to attract highest FDI in 2014: Unctad; 25 June 2015; Livemint.com website, http://www.livemint.com/Money/ZxJzJKTVc5sPD2XcxJQZvI/India-among-top-10-countries-to-attract-highest-FDI-in-2014.html

2. Surprise repo rate cut: How it impacts you?; 5 Oct, 2015; Money Control website, http://www.moneycontrol.com/news/fixed-income/surprise-repo-rate-cut-how-it-impacts-you_3426601.html

3. Press Information Bureau; 10 Nov 2015; PIB website, http://pib.nic.in/newsite/PrintRelease.aspx?relid=130371

Central Bank of India slashed interest rates

While the global markets continue being volatile, the Reserve Bank of India’s (RBI) move to reduce the repo rate by 50 basis points to 6.75 per cent, has given a new ray of hope to Indian markets for the next quarter.2

This reduction has been appreciated by the stock market and is considered positive for sectors like banking and real estate interest rate slashing has been hailed by the stock market and is seen as incrementally positive for banking, real estate sector and the overall economy when coupled with developmental and regulatory measures.

With banks extending this benefit to borrowers, we expect the move to encourage corporates for investing in economy. Combined with the government’s commitment towards making India an attractive place to do business, the rate cut is expected to yield favourable results for the economy.2

High level of non-performing assets in the corporate sector still a cause of worry, but the RBI hopes that reduced rates shall aid the momentum of a fresh investment cycle.

Reform push in FDI

The latest review of the Foreign Direct Investment (FDI) policy, embraces substantial measures to increase FDI caps in select sectors. With this, 49 per cent equity becomes the ‘prime’ point of departure for the next round of reforms.3 Further, the revised policy allows more undertakings under the automatic route, limiting approval requirements only to a handful of vulnerable sectors such as multi – brand retail trading, insurance etc. Overall, the revisions touch upon 15 key areas/sectors.3

Other important changes include enhanced limit of proposals qualified for Foreign Investment Promotion Board (FIPB) consideration and other impending amendments, consisting of those being borne by limited liability partnership as well as NRI owned companies interested to invest in India. All these changes mark a significant step forward in India’s FDI landscape and clearly patronages the government’s agenda of ‘minimum government maximum governance’. A detailed press note by DIPP is expected shortly.3

Launch of state ranking

While India’s national ranking has increased, the government is encouraging states to step up to the challenge. In order to enhance ease of doing business, the national Department of Industrial Policy and Promotion (DIPP), created a 98-point reform framework highlighting good practices/recommendations in various areas. The report marks our contribution to help create a more business friendly environment by supporting the governments initiatives at both national and state levels.

The report can be accessed here.

Executive summaryIndia’s reputation as a global economic force has been rising consistently in the last few months. A substantial portion of this growth has been attributed to efforts undertaken by the government at national and regional level. While we still need to work towards achieving some milestones, India’s ranking in the global Ease of Doing Business report titled ‘Assessment of State Implementation of Business Reforms’ published by the World Bank in September 2015, rose significantly. According to the same report, India now ranks 130 out of 189 countries in the ease of doing business, moving up 12 places from last year. This is due to the changes introduced by the government with reference to some policies and procedures. India’s target of being in the top 50 can be achieved if the private and public sectors came together and worked in collaboration with each other, to utilise the country’s true potential. India, as a national brand ranks seven in the world, with an increase of 32 per cent to USD2.1 trillion, according to Brand Finance’s report ‘Nation Brands 2015’, released in October 2015.

India ranked

on the list of top 10 destinations for FDI1

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Over the past year, there has been a significant improvement in the positioning and perception of ‘Brand India’ globally. India’s position in the World Bank’s ‘Ease of Doing Business’ index has moved to 130, up by 12 places since 2014, and a report by brand valuation firm, Brand Finance pegs India’s brand value at USD2.1 trillion in 2015, a growth of 32 per cent from the previous year. There is still a long way to go and many hurdles to overcome, however, the feedback we have received through our interactions, with International/oversees clients over the last few months indicates that the tide is running high. There is growing interest within the countries to know how India would perform in the coming years and achieve its target to be an attractive business destination for investors, globally.

A key factor that has led to an increase in investor confidence are the initiatives undertaken by the government over the last one year, which have helped project India as a business-friendly destination. These initiatives, if implemented in the right spirit, are likely to further support India’s business aspirations. These include proposed higher Foreign Direct Investment (FDI) allowances for the insurance and pension sector, new land purchase rules to facilitate infrastructure development, labor reforms, reduction in public subsidies and asset sales. According to KPMG International’s Global High Growth Markets Outlook 2015 report, 77 per cent respondents in a global survey of senior executives were optimistic about India’s recent reforms. On the investment front, India overtook China as the top destination for greenfieldinvestments for the period January–June 2015, at a time when FDI in the emerging markets globally showed a declining trend.1

Although the groundwork has been laid out in terms of policy reforms, one of the major challenges lies in implementing these reforms and initiatives. India needs to showcase the confidence bestowed in it by thoroughly delivering on its promises. Some of the challenges include interpretation of regulation, infrastructure issues, safety, environment health and safety, bribery and corruption, etc. These are also consistent with the feedback received in the report. We need to wait and watch how the government carry forwards the momentum and positive investor sentiment, while overcoming the challenges for implementing the reforms that have been planned.

1. India grabs investment league pole position, 29 September 2015, The Financial Times website, http://www.ft.com/intl/cms/s/3/fdd0e3c2-65fc-11e5-97d0-1456a776a4f5.html#axzz3qUnxiksL,

Akshay BhallaPartner - Sales and Markets, KPMG in India

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India’s improved brand image

The vision of digital India

Market trends

1. Modi Silicon Valley visit: PM Narendra Modi promises more accountable and transparent governance; 27 September, 2015; Financial Express website, http://www.financialexpress.com/article/economy/pm-narendra-modi-meets-satya-nadella-sundar-pichai-other-tech-titans-in-silicon-valley-10-latest-developments/142048/

2. Modi effect: Silicon Valley giants commit to Digital India; 26 September 2015; The Hindu Business Line website, http://www.thehindubusinessline.com/info-tech/modi-in-silicon-valley-tech-giants-commit-to-digital-india/article7694877.ece

3. How Silicon Valley can turn India’s economy around; 28 September 2015; Fortune website, http://fortune.com/2015/09/28/narendra-modi-silicon-valley-india/

On a mission to strengthen the digital infrastructure of the country and usher the internet revolution, India’s Prime Minister Mr. Narendra Modi toured Silicon Valley recently. The visit involved engaging with leading technology firms to discuss ideas on bringing India into the digital world. With this move, the government is now recognising the modernisation of India’s digital infrastructure as an impetus to economic progress.1

Stressing on opportunities available for Innovation and entrepreneurship, the Prime Minister said, “from creating infrastructure to services, from manufacture of products to human resource development, from support governments to enabling citizens and promoting digital literacy, Digital India is a vast cyber world of opportunities.”2

Tech honchos have assured the Indian Prime Minister that they share his vision of transforming India into a digitally empowered society and knowledge economy. As a response to the invitation, major technology giants have already announced India specific projects.2 While Google plans to enable Wi-Fi at 500 railway stations, Microsoft plans to help the government take low-cost broadband to five lakh villages. Microsoft also plans to make India its hub for cloud services through data centres located in the country. Qualcomm, a company that designs and markets wireless telecommunications products and services announced a USD150 million fund for start-ups in India and Facebook has started a project to enable Wi-Fi hotspots in rural India.3

The vision of ‘Digital India’ is to achieve a revolution in the internet market. According to a Morgan Stanley research report, ‘Get Ready for India’s Internet Boom’ published in June 2015, the Indian internet market could rise to USD137 billion by 2020, and the nation could follow the path of China, where e-commerce has increased significantly over the past decade with wider penetration of internet. Given this context, digital revolution is expected to spur incremental growth not just for India, but also for the global economy, with China’s economic future looking uncertain, India is increasingly been seen as a highly lucrative emerging market for foreign businesses.3

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Neeraj Bansal Partner and Head - Real Estate and Construction,KPMG in India

Insightsinto key government initiatives -

Real Estate

1. Assessing the economic impact of India’s real estate sector; 2013; CREDAI

2. Real Estate & construction sector to create maximum jobs by 2022: NSDC; May 2015; ETRealty.com website, http://realty.economictimes.indiatimes.com/news/industry/real-estate-construction-sector-to-create-maximum-jobs-by-2022-nsdc/47162095,

3. Handbook of Statistics on Indian Economy, RBI; September 2016; KPMG in India analysis

4. Private equity in real estate, November 2015; Morningstar website, http://www.morningstar.in/posts/34843/private-equity-in-real-estate.aspx

Foreign investors are investing aggressively

The sector is witnessing heavy fund raising from large foreign and domestic private equity, pension and insurance funds. Since 2014, Indian real estate focussed Private Equity (PE) funds have raised USD2.2 billion, excluding platform level deals totalling to USD2 billion. The quantum of PE activity since 2014 is more than the 2009 to 2013 period during which period, the fund raising totalled USD3.9 billion. Investors are investing in selective residential and commercial assets across top few cities. Further, the due-diligence and the level of involvement of PE in development has increased substantially.4

Recently, the government relaxed FDI norms by removing important restrictions on amount of capital or project size and providing easy exit to investors. It is expected to benefit numerous small to mid-size projects which are stuck for want of capital. For large scale developers, relaxed exit condition could help them re-attract investors. The new norms would help improve liquidity issue not only for real estate sector but also for overseas investors, who found it difficult to exit from project due to restrictions.

The relaxation would now allow the large community of High Net-Worth (HNI) Non Resident Indians (NRIs) or Person of Indian Origin (PIO). The reform may support the affordable housing segment also which is still in its nascent stage and in general, most projects were not qualified to receive FDI due to small project size.

Cont...

Real estate sector is an important contributor to the Indian economic and social growth. In 2013 it contributed about 6.3 per cent to the India’s GDP1 and is the second largest employment generator in India.2 Since 2000, the sector has witnessed a CAGR of 8 per cent3, except for last couple of years when the growth was in the range of 1-2 per cent3.

Since the global financial crisis in 2008, the sector has witnessed several structural changes led primarily due to consolidation in the sector. Several large corporate houses – with strong brand, financials, and land bank – penetrated the sector on a pan-India level. Several existing practices, especially in the field of funding, design and engineering, project management, development model and scale, facility management and construction technology, witnessed a radical upgrade.

The current slowdown in the sector has led to sector participants focussing on improving operational efficiency, affordable housing, plugging leakages in various construction activities, improving compliance to statutory laws and managing delays. The sector participants have shown keen interest to adopt the global best practices in these areas.

Renewed government focus

The government introduced the following reforms such as Real Estate Investment Trust (REIT), building 100 smart cities, ‘Housing for all by 2022’ and complete relaxation of foreign direct investment (FDI) norms which are expected to provide a momentum to the sector’s growth. Further, the Reserve Bank of India (RBI) has introduced reforms to improve affordability by reducing interest rates and increase loan-to-value ratio for housing loans.

The government is working to introduce Goods and Services Tax (GST), law to balance acquisition of land, introducing real estate regulator, and easing the approval process of building and construction projects.

The vision of providing accommodation to all the citizens is expected to open the affordable housing sector. As per our study ‘Decoding Housing for all by 2022’ published in 2014 - the Government need to develop about 110 million houses translating into an investment of more than USD2 trillion. Specific technologies and solutions such as Pre-fab, Mivan system, project management services etc. reducing construction cost and time are in high demand.

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Key challenges in real estate and construction sector

Major challenges affecting the real estate sector in India are explained below:

Weak market: The property prices in major markets have not moved much in the last two years. High property prices, large unsold inventory, and weak sentiments limited absorption and thereby new launches. The National Capital Region has the highest inventory pile up followed by the Mumbai Metropolitan Region5.

Schedule and cost overruns: It is estimated that about 25 per cent of housing projects across India are delayed due to poor project management, lack of commitment, liquidity crunch and delay in regulatory approval6. The delay in construction, coupled with inflation, has almost doubled the construction cost in India since 20087.

Lengthy approval process: For a building project, it is estimated that a developer has to secure over 40 different kinds of approvals taking anywhere between 2-3 years before the commencement of construction8.

5. Will the Real estate bubble burst due to falling sales & rising inventories?; August 2015; ETRealty.com website, http://realty.economictimes.indiatimes.com/news/industry/will-the-real-estate-bubble-burst-due-to-falling-sales-rising-inventories/48637577,

6. Over 25% housing projects delayed pan-India; October 2013; Business Standard website, http://www.business-standard.com/article/companies/over-25-housing-projects-delayed-pan-india-ncr-worst-hit-jll-113100100726_1.html,

7. KPMG in India analysis based on discussion with clients

8. Decoding Housing for all by 2022; 2014; KPMG in India

Sector outlook

The sector remains subdued at the moment due to weak demand due to low-affordability. With little movement in property prices, the affordability is gradually improving and the current weakness in the market may remain through 2016 . In near future, developers would continue to focus on completion and few selective launches by strong developers may happen.

The fund raising and investment activities are expected to remain robust but are expected to remain focussed on selective asset classes and cities as investors are giving importance to risk over returns.

Clearance of important reforms such as GST, Realty bill and taxation issues in REITs are expected to create the positive momentum in the sector.

Jaijit BhattacharyaPartner - Infrastructure and Government Services, KPMG in India

tear of a flyover or a building that is on the verge of collapse, ensuring that the police station is able to receive emergency response requests from mobiles and is able respond to it, etc. This implies that governance in Indian smart cities also needs to change. What should be the procedural changes in the police station so as to be able to respond to emergencies in a time bound manner? How will a city manage massive urban migration? How will cities manage large worker population? How will a smart city ensure that a working mother is provided with safe crèche facilities with appropriate regulatory frameworks that would enable her to fully unlock her economic potential? Only when these issues are also addressed will we be able to achieve smart city in an Indian context.

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Can you help us understand the scope and limitations of the ‘smart cities’ initiative?

To understand smart cities, one needs to step back and look at the role of cities. The primary function of cities is to facilitate secondary and tertiary economic activities that do not involve agriculture or mining or animal husbandry but involve processing what comes out of mining and agriculture such as factories and provide support to manufacturing such as financial services. Hence, secondary and tertiary economic activities are more dependent on availability of skilled people and therefore, in order to facilitate these activities, it becomes important for cities to be people friendly and to provide a platform for being more efficient and economically competitive.

In our quest to improve our cities, the concept of smart cities plays an important role. Smart cities are focused on providing improved Ease of Doing Business and ease of living. Thus, smart cities focus on enhancing safety, security, sustainability and energy efficiency, in addition to providing a host of services to its citizens and businesses, that help them become more efficient. Such a focus invariablyleads to a higher adoption of IT and sensors in several aspects of the city such as transportation, water management, etc. However, is this enough for an Indian city? A smart Indian city needs to address additional requirements such as smarter distribution of energy, tracking the wear and

Cont...

Insightsinto key government initiatives -

Smart Cities

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How would cities fund the transformation?

Cities essentially have four asset classes – land, debt, equity and data. In addition, it has financing from user charges and taxes & grants from the centre and state. In order to be able to fund its transformation, at the end of the day the fund needs to be realised through one of the above sources.

The initial funding for cities could come from the central and the state government as an investment into a proposed city Special Purpose Vehicle (SPV). This entity shall use its bankable balance sheet to leverage the initial funding from the state and the centre, to garner further funding in the form of debt or in the form of private participation through equity. Access to such funds may depend on the bankability of the projects that are conceived by the city’s leadership. The funding could thereafter come from debt from banks, multilateral agencies, sovereign funds, pension funds, municipal bonds (General obligation bonds, revenue bonds, industrial development bonds), provident funds, equity partnerships, direct sale of real estate, venture funds, etc.

Each of these funding sources have their peculiarities and nuances that need to be addressed.

Also, foreign currency debt would need to be hedged which eventually increases the cost of funds.

And finally, the projects themselves need to be de-risked by subscribing to risk mitigation instruments such as partial risk guarantee for alleviating risks on revenue generation and partial completion guarantee that picks up the Interest Cost of Debt (ICD) if the project gets delayed, thus saving it from spiraling into a Non-Performing Asset (NPA).

Thus funding Indian smart cities faces a slew of significant challenges and limitations which may be complex but not unsurmountable.

How can we support the government for the smart cities initiative?

KPMG in India has been involved in multiple engagements around the Smart City initiative, with various state governments. We have been mandated to create Smart City plans for the New Delhi Municipal Corporation, and shall submit the same to the government for financial support. In addition, we are also part of the consortium that has been shortlisted to help the city of Vishakapatnam to develop its smart city initiatives, with funding from the US government. Both the initiatives shall follow the Municipal Reference Model (MRM). We have also drafted a Smart City Policy for the Gujarat government and are engaged in a public-private partnership based on the smart theme city implementation in Raipur and in Mumbai for the Bandra Kurla Complex.

KPMG in India is also one of the leading advisers in the urban initiatives such as HRIDAY (Heritage cities) and Swach Bharat (Clean India).

What is the role of technology in developing smart cities?

Technology is a key enabler for smart cities. Each aspect of the city is expected to be technology enabled, in order to make the service efficient, affordable and effective. A smart city may end up having an all pervasive, interconnected technology fabric, that enables the city services to function in a smooth manner, thus providing economic efficiencies to the businesses and providing the ease of living to its citizens.

Smart cities are expected to use a large array of sensors and transducers, including smart cameras, that would all come together into a monitoring and command and control centre, which could allow the city administration to function in a more effective manner, consuming less resources and providing a safe, secure, energy efficient and sustainable city.

It also includes making basic infrastructure such as Sewage Treatment Plants, Green to Gas plants and other such infrastructure smarter, thus transforming the entire city into a smart city.

KPMG in the newsPartners from KPMG International’s network of member firms were quoted by the media at the Global Sales and Markets Meet held in India.

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1. There are some’ questions on execution of Make in India on the ground; 14 Oct 2015; Business Standard

2. ‘The comfort of online buying will boost e-commerce, but brick and mortar outlets will have their share in the consumer space; 12 Oct 2015; Business Standard

3. (1) Shortage of Doctors creates opportunities for India; 7 oct 2015; Business World (2) India Can be Cradle of World’s Healthcare Needs, says Britnell; 26 Oct 2015; The Economic Times

4. We Should have the Right Management Info to Drive a Bank; 12 Oc 2015; The Economic Times

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““ I like the focus that India is placing on the manufacturing sector as a whole. It has tremendous opportunities to employ large sections of Indian workforce. 1

Doug GatesPartner and Global Head of Industrial Manufacturing and Aerospace and Defence, KPMG LLP (US)

The comfort of online buying will boost e-commerce, but brick and mortar outlets will have their own share in the consumer space. 2

Willy J KruhPartner and Global Chairman, Consumer Markets, KPMG in Canada

Shortage of doctors creates opportunities for India. 3 (1)

India can be a cradle of world’s healthcare needs. 3 (2)

Mark BritnellPartner and Global Head of Healthcare, KPMG LLP (UK)

Payment and small banks will drive a lot changes. They may not take a huge amount of volume but they typically bring a different view to the market. 4

Jeremy AndersonPartner and Global Chairman, Financial Services, KPMG LLP (UK)

Partner speak

1. World Urbanization Prospects: The 2014 Revision, Department of Economic and Social Affairs, United Nations

Jaijit BhattacharyaPartner - Infrastructure and Government Services, KPMG in India

Neeraj BansalPartner and Head - Real Estate and Construction,KPMG in India

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The growing economy and infrastructure around Indian cities, urban population is bound to increase on account of growth in employment opportunities and social benefits. According to latest study by United Nation, Indian urban population is expected to increase by 404 million reaching 814 million by 2050.’1 Government initiatives like ‘Housing for All by 2020’, creation of 100 new smart cities, rejuvenating another 500 cities and relaxation of FDI norms in construction sector last year are likely to add value to the overall urban infrastructure development. However, we need to develop healthy and sustainable urban infrastructure across the country. Adequate project management, effective construction techniques and good governance, urban areas in the country can provide the envisaged economic and social benefits to citizens. As India redesigns its urban landscape, the industry needs to align its long-term economic goals with an effective and sustainable urban development strategy.

Urban infrastructure is now increasingly seen as part of a larger city transformation initiative rather than a series of individual infrastructure plans. Such a change in the manner in which urban infrastructure is being looked at can help in a more coherant and efficient rolling out of urban infrastructure, as one initiative does not disrupt or damage another piece of urban infrastructure that would have been laid out. Such a perspective is being labelled as area based initiative as opposed to a project based initiative. What has also been planned is to smartify the infrastructure so that the cost of operations and maintenance comes down dramatically.

Our publications

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The Rising Sun - Disruption on the horizonThe third edition of the Rising Sun is inspired by the clear trend of renewable energy emerging as a mainstream energy source globally within the next decade. In addition, the edition draws from the recent developments that have taken place in the solar PV cost curves and what those mean for the fast-growing Indian economy.

India and Africa - Collaboration for GrowthCII and KPMG released a report which brings out the mutual strengths of both the regions. The report identifies collaboration in key sectors namely Infrastructure, Energy and Natural Resources, Agriculture, Healthcare.

Impact of e-commerce on Indian SME’s This whitepaper puts together a business case with the principle purpose to introduce a way of thinking that would cause various stakeholders in the e-commerce ecosystem to consider value, risk and priority as fundamental elements for efforts to be put in the direction of increase in adoption of e-commerce by SMEs.

Challenging the tides - Indian real estateThe Indian real estate industry has been a strong propeller towards the country’s economic performance. Being the second largest employment generator in India, the sector contributes a significant percentage to India’s GDP (measured at 7.8 per cent in 2013-14). The sector has come a long way and has been coming around in the last decade from being unorganised to a dynamic and structured sector.

Click for the report Click for the report

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