India Focus

S t r a t e g i c    A n a l y s i s    a n d    F o r e c a s t s

Vol 4, No 1

January 1999

Politics    •    Business        Economy    •    Society        Culture    •    Diplomacy

Industry Forecast -Part 1


Analysis of Current Developments

Short-Term Forecast

Consumer Goods

There was a healthy 14 percent rise in overall demand for consumer goods and durables in Q3, and sales of colour televisions grew by almost 40 percent between April and December ‘98. This growth was mainly due to a post-monsoon spurt in demand from rural areas, and also because almost all manufacturers have by now introduced some kind of trade-in scheme to lure price-conscious Indian consumers.

The downside, however, is that these trade-in schemes provide very thin profits, and foreign manufacturers are being forced to abandon brand-building activity and concentrate on building distribution channels. Others, such as Revlon, have been forced to reduce their dependence on premium products in favour of "Indianized" budget-range products. Overall, within many MNCs, there is now a lack of synchronization between global strategy and Indian business plans.

Direct selling companies such as Amway, Oriflame, Avon, and Doring Kindersley have in recent months become rather prominent, either because of many product launches or because of highly visible campaigns to recruit distributors. The results, however, have so far been rather poor. Amway has earned a bad name for itself among many of those who have paid to become its distributors -- there is now even an Indian internet site which claims to "expose" Amway -- and local consumers are also resistant to this new concept due to cultural factors. The government is now studying various schemes to monitor and regulate the direct selling industry, especially on levying sales tax.

Attitude towards consumer goods MNCs is slowly, but surely, changing, and they are no longer viewed as a major threat to domestic firms. Local companies, such as BPL and Videocon, have managed to retain their market shares, while many MNCs continue to underperform and struggle with high sunken costs.

The focus of political debate on foreign investment has clearly shifted away from consumer goods and towards infrastructure, and despite the swadeshi (protectionist) lobby, this sector will perhaps become less controversial in the near term. But officials also know that, given the overcapacity in this sector, new FDI is unlikely in any case in the near term -- some Korean MNCs in electronics may actually start disinvesting from India in favour of brand licensing -- and, so, there is no great necessity to offer consumer MNCs any further concessions in import duty or tax rates.

As a matter of fact, it is likely that there will be a small increase in the excise and import duties on select consumer goods in the next budget, specially textiles, electronics and high-end durables. This will negatively affect current demand growth. In any case, we expect the current high growth rate unsustainable since real incomes are rising very slowly. The BJP regime is also not expected to initiate any major drive to de-reserve items currently under small-industry protection. Overall, the next few months will be difficult for MNCs in this sector.

Overall Likely Change:


Sales of passenger cars and commercial vehicles continued their long-term slide. Foreign majors, such as Mitsubishi, Ford and GM, are currently operating on less than 50 percent capacity utilization, and are constantly being forced to reduce sales targets.

Despite the recession, many new models were launched in the small car segment. Indica, the new car by the Tata Group, has generated excitement in an otherwise dull market, and has surprisingly received over 100,000 orders (versus a target of just 25,000). This has forced Suzuki and Fiat to cut prices and redesign some models.

Auto JVs are now changing hands, with Indian firms realizing that this business requires long gestation period, continuous cost improvements and model launches, and huge funds. Ford now owns almost 93 percent of its Indian JV, and GM has recently bought full control.

Recent trends indicate that this sector is now a high-priority with the government. For the first time, a state government (Maharashtra) has given generous sales-tax sops to a car major (Tata), and the Finance Minister has indicated some duty concessions in the coming budget.

For political compulsions, the BJP cannot afford to be seen as pandering to the rich, and any excise duty cuts in the budget will be marginal and unlikely to arrest the current slump in car sales. The weak market is due to a combination of factors, including trimming of corporate perks, and a recent government drive to audit car buyers in order to detect tax evasion. Moreover, with so much money tied up in booking the Indica, there are even fewer new customers left in the market. Thus, the auto market will stay depressed in the short term, but may improve by Q3 ‘99 as part of an overall expected revival of key cyclical industries.

Overall Likely Change:

Pharmaceutical & Health Care

There was lots of positive news in the past few months for foreign pharma companies. First, the BJP regime finally came out openly in support of changes in patent laws, introduced the Patent Amendment Bill in Parliament and got it passed in the Upper House (it is now pending in the Lower House), and also issued an executive ordinance for introduction of exclusive marketing rights in pharmaceuticals (with retrospective effect from Jan 1, 1995). Second, pharma sales registered a growth of over 15 percent in Q3, and scrips of most pharma MNCs have climbed by almost 50 percent in the last 6 months.

The government also denied permission to local firms for exporting new molecules (such as Viagra) which have not yet been clinically tested and cleared by the Drug Authority of India. This has effectively added another level of patent protection to pharma majors, and has upset export plans of many small Indian companies who previously existed solely on the basis of copying new formulations.

The Russian currency crisis and a new countervailing duty (in the range of 4-15 percent) imposed by EU also adversely affected drug exports in the past few months. As a result, many small and medium players are being edged out. Smaller companies are increasingly either being acquired by, or selling pharma brands to, larger Indian companies. Since Sept ‘98 alone, more than 60 pharma brands have been sold, including well-known names like Crocin and Combiflam.

The current government has initiated many industry-friendly measures: the new National Pharmaceutical Pricing Authority has conducted 4 price decontrol exercises in the past 3 months, some prescription drugs have now been transferred to OTC category, and the cabinet has just recently allowed free import of 5 important bulk drugs, including Vitamin B1 and Tetracyclin.

The Indian pharma industry is going through a period of critical change, and the overall direction of government attitude in recent months towards pharma MNCs has been positive. This is due to three factors: 1) WTO obligations, and sustained international pressure over this on India, 2) the growing role of pharma scrips in shaping overall stock market confidence, and 3) a growing realization, especially after the Indian-born Amartya Sen won the recent Nobel Prize in Economics, that improved health care and social sector spending is a now a must.

There are strong signals coming from senior government officials that the next budget will include a significant increase in public expenditure on healthcare, thereby boosting pharma sales. The Patents Amendment Bill is also likely to be passed in the Lower House, though the actual process will face some political posturing by all political parties.

Overall Likely Change:

Other Sections in January 1999 Issue

Industry Forecast: Part 1

Consumer Goods
Pharmaceutical & Health Care
Industry Forecast: Part 2

Oil & Gas
Industry Forecast: Part 3

Tourism & Aviation
Mining & Metallurgy
Ports & Highways
Political Trends Anti-Christian Agitation
Analysis & Implications
Economic Summary
(including Budget Forecast)

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