Business Opportunities in India

February 28, 2008



Business Opportunities in India



HARI PANDAY

President and CEO, ICICI Bank Canada



Chairman: Catherine S. Swift

President, The Empire Club of Canada



Head Table Guests:



Verity Craig: Divisional Director, Hays Executive, and Director, The Empire Club of Canada

Charmie Atibula: Grade 12 Student, Parkdale Collegiate Institute

Reverend Ajit John: Priest in Charge, St. Matthew’s Riverdale Anglican Church, and Counsel, Law Society of Upper Canada

John Stackhouse: Editor, Report on Business, The Globe and Mail

Robert G. Long: Director, ICICI Bank Canada

Satish C. Mehta: Consul General, Consulate General of India

Don McCutchan: Partner and International Policy Advisor, Gowling Lafleur Henderson LLP, and Vice-President, The Empire Club of Canada

The Hon. Senator David P. Smith: PC, QC, Director, ICICI Bank Canada

Hon. Sergio Marchi: Senior Business Advisor, Lang Michener LLP

Sean Weir: National Managing Partner, Borden Ladner Gervais LLP.



Introduction by Catherine Swift:



India and its rapid economic development in recent years is very often a topic in the news these days. We often see India and China mentioned in the same breath, and although both Asian countries are developing very rapidly and do have some things in common, there are also several key differences that will become more relevant in future. One is that the economic growth in India, while very rapid, has been going on a lot longer than in China. It has been quite some time now that India began focusing on educating its youth and preparing them to compete in a globalizing world. So India’s development, while remarkable, has not been quite as much of an “overnight sensation” as has China’s.



Another key difference is the demographic profile. In China, demographers have noted that China’s “one child” policy will soon really begin to hit home, and that future labour shortages may actually slow the country’s development. India’s profile is exactly the opposite. In a world where most countries, and certainly the western developed countries, are facing labour shortages that will only worsen in the coming years, India has a growing army of young people which is likely to make it even more of an economic success story in the years ahead.



Our speaker today will discuss what is happening in India of late and how Canadians can further benefit from its growth and success. Hari Panday is the President and CEO of ICICI Bank Canada. His career spans 26 years to date, including forming a green-field Schedule II chartered bank in Canada, corporate and commercial banking, international trade, real estate finance debt restructuring, and credit and computer audit functions. He was the founding President of ICICI Bank Canada, which commenced its operations in December 2003. The bank has evolved as a full-service direct financial-services organization with eight branches and over $3 billion in assets. He has also held senior positions at HSBC Canada and the Bank of Montreal. Prior to his banking career, he worked with Price Waterhouse & Co.



His academic background includes a CGA designation and a BA in Economics and Political Science. He is a member of the CGA Association of Ontario, the Board of Trustees of the Royal Ontario Museum, the Board of Roy Thompson Hall and Massey Hall and a member of the Mayor’s Economic Competitiveness Advisory Committee, among other positions.

Please join me in welcoming Hari Panday.



HARI PANDAY:



Ms. Catherine Swift, President, the Empire Club, Rev. John, the Hon. Sen. Smith, the Hon. Sergio Marchi, Mr. Satish Mehta, Consul General of India, honoured head table guests, federal, provincial and civic leaders in the audience, ladies and gentlemen:



Let me say, it is a great honour and privilege for me to address the members of the Empire Club, meet many successful Canadian business and political leaders and share this platform with an extraordinary list of leaders from around the world. I would like to acknowledge our head table sponsor Mr. Sean Weir and his firm Borden Ladner Gervais.



I will begin by saying that we are proud to have chosen Toronto and the province of Ontario to commence our business in Canada. Toronto is a city that is diverse, forward-looking, committed to be the best place to do business, raise a family and be at the top spot for arts and culture. All these factors have been captured by Mayor David Miller’s recent report “Agenda for Prosperity,” culminating from the work done by many CEOs and I had the privilege to serve on his advisory council. I would like to acknowledge the presence of Councillor Kyle Rae, Randy McLean, Manager, Economic Policy, City of Toronto, Dave Purewal, Senior Policy Advisor, and Mandy Maghera, representing Minister Harinder Takhar, Minister of Small Business and Entrepreneurship.



Since the founding of ICICI Bank Canada in 2003, our journey in Canada has been simply spectacular, mostly due to the support of our clients spanning coast to coast and a great deal of effort put in by my colleagues in Canada and India. In four years ICICI Bank Canada has become the most recognizable brand name today among the Indian companies operating in Canada. Our message to Canadian businesses is that if you think of Canada-India linkages think of ICICI Bank. India is our backyard and for the Canadian consumers if you think of “best-in-class” rates and services think of ICICI Bank.



We are the alternative bank you have been looking for in the financial-services industry. As a full-service direct bank we have reached an asset base of $3.3 billion, a milestone never achieved before by a full-service foreign bank in Canada within four years of starting its operations in Canada, which is a very mature market.



We have made a good effort in redefining full-service banking in Canada. We have accomplished that while building excellent relationships with the best Canadian financial institutions and the regulators and advisors in Canada, many of whom are present here today.



As a Canadian chartered bank with expert knowledge about India and the Indian environment, our inherent mission is to promote strong trade and commerce ties between Canada and India. It is now a global reality that robust and fair international trade leads to prosperity and economic well-being. I am passionate about Canada’s economic prosperity. It dovetails into another reality today when there are many nations emerging as centres of economic power. Many nations like India have turned the tide by becoming the “new West” on the other side of the globe.



It is very important to recognize that the present India story began 15 years ago in 1992 with the implementation of across-the-board economic reforms. During this period the impact of those reforms has progressed to an advanced stage that many India-watchers still refuse to acknowledge. Any foreign company looking to do business in India today should not think of India as a barren frontier. Indian companies do not think of themselves as new players on the world stage. In fact, foreign companies should come to grips with the reality that India and Indian companies are on a fast track.



To understand India with a certain level of confidence and reliability, please focus on its people, the mercantile environment, the DNA of the collective population, its leaders and their thought process, India’s friendly relations with its trading partners and multi-lateral relationships with the ASEAN countries, the European Union and the United Nations. The simplest way to explain India is that it is not merely a trading nation, but rather a nation of traders. Its business and political leaders today have an immense hunger to be a serious player on the world scene by embracing the best business practices, corporate governance principles and respect for rule of law with the underpinning of mutual success.



India has a healthy domestic market and an export-oriented economy that acts as a feeder to the West, African sub-continent and the East. Its industrial growth has caught up with the growth of the services industry. I think the world has heard enough of the 8–9 per cent growth in GDP and even more of India’s comparison with China. All of these stories make good headlines but distract from the real issue. In India’s case, it is competing with itself.



For a Canadian company it is important to examine the opportunities in the domestic scene and perhaps in the United States and then look at how your competitors in India are staring at your market share faster than you had thought. Many companies I know are still trying to pursue their international strategy in the same manner they formulated it in the last decade. They must not only change their strategies applicable to international business but also the domestic market.



An Indian company today invests in production facilities to handle global markets, so achieving scale at lowest cost and best quality is the combination you have to compete on. You would have to do the same. If your objective is to cater to the Indian consumer, then think of scale and realize that your understanding of India has to be refined on a regional and individual city basis. It is not a homogenous country. It has 20-plus cities with a population of three million or more, with five metros reporting a day-time population of over 15 million.



In our mind at a macro level, there is a combination of six key economic drivers at work behind this phenomenal growth, what we call the six pillars:

• Favourable demographics;

• The knowledge capital;

• An emerging service sector;

• Pipeline for investments;

• Globalization of Indian firms; and

• Rising disposable income.



This combination is driving both capital investments from domestic and international investors and this investment and consumer cycle is mutually re-enforcing. Let us see what the consumption drivers are.



First, it is the make up of today’s approximately 50 million middle-income and three million high-income families. In the top-24 cities the migration to the high-income group, that is the group making over $12,500 per annum, is rising at a rate of 40 per cent per annum. That means by 2010, only two years from now, we estimate 10 million families to be in the high-income category and 98 million families to be in the middle-income group.



Next, with a current per-capita income of $1,000, Indian masses are experiencing an increased affordability of goods and services and aspiring for a better lifestyle. As this moves from $1,000 to $1,500 per capita, there will be a demand for a better living environment moving towards the next horizon of acceleration in the consumption cycle. That puts US$500 per person incrementally in the economic system or $45 billion per year compounded annually. Just imagine the velocity of this money. Simultaneously, the personal consumption side is driving the housing industry, transportation and personal demand for personal credit.



In my mind the most crucial aspect requiring attention and investment drivers in the coming months and years in a nutshell is infrastructure, infrastructure, and infrastructure.



Industrial capacity utilization is reaching optimal levels in pretty much every major industry: auto, cement, food and beverage, shipping steel and textiles. Good news is that expansion since 1992 has been driven by an entrepreneurial class and not the state, showing the journey thus far to be profitable and lending to the strength of their balance sheets.



Our conservative estimates indicate that in the next four years India needs to invest $500 billion in its infrastructure and Indian companies will generate approximately $150 billion in investments from their internal cash flows. That brings me to discuss the opportunities for Canadian enterprises.



Opportunities for Canadians



In order to do that it is best to focus on our industries where Canada is strong. I feel these industries include:



• Financial services,

• Legal services,

• Knowledge-based sectors: IT and IT-enabled services,

• Research, analytics and design,

• Organized retail,

• Telecom,

• Education,

• Auto components,

• Tourism and hospitality, hotels, wines,

• Mining and minerals,

• Oil and gas,

• Medical services.



In the interest of time, I will touch upon only some of them, so let’s begin with the services sector and financial services in particular.



A recent global study by McKenzie confirms what we on Bay Street are familiar with: globalization of financial markets is strongly at work, cross-border investments are growing and emerging markets are at the centre of future cross-border capital flows. Global capital flows have grown faster than the value of world trade, world GDP or the world’s financial assets. China and the Gulf countries have become significant foreign investors around the world.



India itself has an estimated $250 billion-plus in foreign investments. Concurrently, to support its growth, India’s appetite for foreign investment is very high. Among the emerging markets it is the seventh-largest destination for capital inflows, just about the same level as Israel, Hungary, Poland and South Africa—all countries much smaller in size by most measures.



Financial deepening has occurred across the world and in India. It has sophisticated financial markets that have proven their capacity to weather the storm back in 1997 and most recently with the sub-prime crisis rocking North America and Europe. The services sector in India now represents 60 per cent of the GDP and is expected to grow at 10 per cent per annum, including business process outsourcing.



Some of you must be familiar with the two recent events showing the evidence of confidence in the future of Indian markets and economy. Firstly, the success of the largest-ever initial public offering (IPO)—Reliance Power—which by the end of the first day was subscribed 10.6 times, receiving applications totalling Rs. 1 trillion. There was a stampede; funds were raised for 13 power projects yet to be commissioned but that will generate 28,000 MW power. Next, the most talked about car, Tata’s “Nano.” Auto executives in the U.S., Europe and Japan are busy raising doubts about its emission and safety standards, yet wondering how they will position against the entry of a new competitor like Tata “Nano.”



Equity markets are robust and Canadian banks, insurance companies and pension funds should prepare for the next phase of financial-sector reforms that is expected to be considered by the central bank by 2009. In the banking world, both existing and first-time banking customers will look for savings, borrowing, investment and assurance products. The consuming class is expected to reach $600 million by 2015.



Here are some specific segments:

• Consumer finance—low penetration at 13 per cent GDP as compared with near-90 per cent for North America;



• Participation in industrial and infrastructure investment—pipeline at $500 billion, where we are a significant player and would very much like Canadian institutions to participate with us;



• Mergers and acquisitions (M&A) by Indian corporates. Last year our bank was involved in 88 per cent of outbound Indian M&A financing deals; we are ranked as number two in offshore corporate syndicated loans. In 2007, Indian companies did $51 billion in M&A deals, including Corus Steel by Tata that accounted for $12 billion. Bajaj Auto now has a 21-per-cent stake in KTM Power Sports AG, Europe’s second-largest sport motorcycle manufacturer.



• Debt management and collection. Euler Hermes and Allianz has just set up an entity to handle collections business;



• Financial Planning;



• Corporate Banking—a good way for Canadian banks to expand this asset class and propel their Net Interest Income;



• Project Financing;



• Private Equity—$19 billion in deals done in 2007; in three years it is expected to reach $40 billion;



• Asset Management—North American focus;



• Rural Banking. Canadian banks have expertise in providing farmer financing, agri-businesses and commodity-based financing. This market is growing at a rate of 50 per cent per annum.



Legal Services



There are many law firms in attendance today so for their benefit, foreign law firms continue to be in a holding pattern, but whenever the commercial legal services market is thrown open, the U.S. and British firms are well prepared to hit the ground running.



These firms have been hiring Indian lawyers and law graduates and forging ties with Indian law firms. See how the Indian lawmakers have allowed the foreign law firms to participate without a formal entry.



Foreign law firms already have an enviable list of Indian companies. Clifford Chance and Baker & McKenzie reportedly have over 200 lawyers each, dedicated to the India-desks. These law firms and others such as White & Case from New York are picking up from Indian law schools the best graduates who can compete with any from the U.K. These are the resources advising Indian and foreign clients on Indian law. Domestic firms remain at a disadvantage because they are not able to advertise or even have a Web site.



Organized Retail



• The best Canadian story is Bata with distribution across India.



• The major entrants include domestic giants like Tata and Reliance.



• There are opportunities in third-party logistics service on a pan-India basis, including storage chains and warehouses.



You should know that the challenge you face in this industry is the realty cost.



Tourism and Hospitality



There is a need for over 100,000 hotel rooms in the entire country. As an example, Bangalore has 4,500 rooms and the city is expected to add some 12,000 rooms in the next three years.



Telecom Equipment



As telecom service providers move from CDMA technology to GSM, they are looking to secure an estimated $8 billion in investments. Local switch and component manufacturers are on the lookout for joint-venture partners.



The same situation exists in the auto-component sectors, where technology upgrades have to happen and there are large players like Bharat Forge, Amtek and Sundaram Fasteners.



Many of you must be wondering that if this situation is so good then is India free from a global slowdown? No it’s not, but its massive domestic market insulates it from sudden, deep shocks. For example, as the global shipment index is currently showing a decline, one can argue that the Indian shipping industry could see some shrinking. But, India is a highly export-oriented economy with large players in every industry segment and their volumes offset any such shocks.



In the current environment, I believe a new list of multi-national companies will emerge and it is going to include Indian companies. Many such homegrown companies have been extremely successful in competing with the global Goliaths who were eyeing to corner the Indian market. There is no question these companies are coming to your neighborhood and domestically they are not going to leave the space open to foreign competition.

In closing, I would like to summarize by saying that:



• Use India as your hub for taking on your competitors in the U.S., Europe, the East and Africa.



• Wage arbitrage can no longer be the sole reason to consider India. You will be competing not just with other foreign companies but domestic Indian companies.



• You should look at the cost efficiency of all the inputs, technical advances and access to those at lower thresholds than elsewhere in the world; the Indian market will provide you with new sources of revenues. • It is our deep desire to ensure that Canadian enterprises grow with us, and consider us as their first port-of-call.

Thank you for listening to me and giving me this opportunity.



The appreciation of the meeting was expressed by Don McCutchan, Partner and International Policy Advisor, Gowling Lafleur Henderson LLP, and Vice-President, The Empire Club of Canada.