Industry Overview. Chapter II. Section A: Engineering & Fabrication Industry

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1 Industry Overview Chapter II Section A: Engineering & Fabrication Industry The engineering industry is the largest segment of the overall industrial sectors in India, accounting for 3% of India s GDP, offering employment to over 4 mn skilled and semi-skilled workers (direct and indirect). It is diverse with a number of segments and can be broadly categorised into two segments: heavy engineering and light engineering. Engineering is relatively less fragmented at the top as the competencies required are high and more fragmented at the lower end, in terms of technology and capital investment and are dominated by comparatively smaller players. The major end-user industries for heavy engineering goods are power, infrastructure, steel, cement, petrochemicals, oil and gas, refineries, fertilisers, mining, railways, automobiles, and textiles among others. Light engineering goods are essentially used as inputs by the heavy engineering industry. Growth in the domestic engineering industry has been fuelled by growth in key end-user industries and many new projects undertaken in various core industries such as railways, power and infrastructure. Capacity creation in sectors such as infrastructure, oil and gas, power, mining, automobiles, auto components, steel, refinery and consumer durables has driven growth in this sector. For example, the domestic sales of automobiles have grown at a CAGR of around 18% over the past four years thereby increasing the demand for engineering goods. Apart from demand from user industries, the availability of technical education infrastructure that provides an increased number of technically trained human resources each year has been another key factor aiding the engineering industry in India. Further, India is being preferred by global manufacturing companies as an outsourcing destination due to its lower labour cost and better designing capabilities. Key factors driving growth in the domestic engineering industry: Growth in the key user-industries Government s thrust on power and construction Global companies preferring India as an outsourcing hub owing to the labour arbitrage advantage and better design capabilities The engineering industry in India manufactures a variety of products, with heavy engineering goods accounting for majority of the production. Most of the leading players in the heavy engineering goods segment manufacture highvalue heavy engineering goods using high end technology. The requirement of huge capital investments acts as an entry barrier. Consequently, the small and unorganised firms have small market presence. The unorganised sector specialises in manufacturing low-technology products while a few small scale units are involved only in assembly of imported components. This segment caters to the replacement market for few products such as low quality small bearings. On the other hand, manufacturers of light engineering goods use medium to low-end technology. The entry barrier is low, owing to relatively lower requirement of capital and technology. This segment is characterised by dominance of small and unorganised players, which manufacture low value-added products. However, a few medium and large scale firms produce high value-added products. This segment is also characterised by small capacities and high level of competition.

2 Classification of Heavy & Light Engineering sub-segments Heavy engineering sector Light engineering sector Textile machinery Rolling bearing Cement machinery Medical and surgical instruments Sugar machinery Process control instruments Rubber machinery Industrial fasteners Material handling equipment Ferrous castings Oil field equipment Steel forgings Metallurgical Seamless steel pipes and tubes Mining machinery Electrical resistance welded (ERW) steel pipes and tubes Dairy machinery Submerged-arc welded (SAW) pipes Machine tool Bicycle Source: Ministry of Heavy Industries & Department of Industrial Policy & Promotion India s exports of engineering goods have grown at 28% (CAGR) during to In FY10, it declined by 18.7% because of global recession, with a fall in its share in total exports. Engineering exports have bounced to touch US$ bn in FY11, recording a growth of 84% over FY10 and 48% above exports. Therefore, exports of engineering goods have seen a steady rise from to the first half of FY12 growing by 84% and 43.6% in FY11 and the first half of FY12 respectively. This was mainly due to faster growth of two major items machinery & instruments and transport equipments besides residual engineering items with very high growth rates. The share of engineering goods exports to total exports have increased from 11.9% in to 23.8% in FY11. The major markets for Indian engineering exports in FY11 were China, the US, the UAE, Singapore, Saudi Arabia, South Africa, Germany, Sri Lanka and the UK. Engineering goods are one of the items that have driven growth in exports of the country in FY12. The resilience in export performance of India has resulted from a supportive government policy, focusing on diversification in terms of higher value-added products in the engineering and petroleum sectors and destinations across developing economies. Performance of Engineering Goods in India s Exports Particulars Share in total exports CAGR (%) Growth Rate (%) to Apr.-Sept Engineering Goods (18.7) Machinery (13.3) a) Machine tools (26.4) b) Machinery & instruments (13.3) c) Transport equipments (12.9) Source: Economic Survey Apr.-Sept. Heavy engineering and machine tools sector mainly consist of capital goods industry. The capital goods industry contributes 12% to the total manufacturing activity, which is 16% of GDP and it provides critical input; machinery and equipment; to the remaining sector. Manufacturing thus forms the key end-user sector of capital goods and further drives the performance of the industry. Capital goods sector registered a growth of 7.6% during Apr-July as compared to 23.1% during the corresponding period of FY11. The upsurge in industrial growth, coupled with government s emphasis on infrastructure developments has augured well for the capital goods industry.

3 Characteristics of Indian Capital Goods Industry Fortunes of the sector are linked with that of the overall industry. Manufacturing sector is the key end-user of capital goods. Labour is highly cost-competitive. Inputs/raw materials are mainly locally sourced. Industry suffers from low technological competitiveness. Relative lack of sub-contracting arrangements despite large scale SME presence in the sector. There is high incidence of indirect taxation (excise duty, octroi duty/entry tax), central tax, sales tax, etc compared to other countries. The sector lags in terms of a strong institutional mechanism for export credit and promotion. Public Sector Undertakings (PSU) have dominating presence in heavy engineering, machine tools and boiler manufacturing. On the other hand, private firms operate in industrial machinery segments such as cement, sugar and non-electrical machinery. Output is concentrated with a few top companies in most product groups (generally large PSEs), followed by a middle layer of companies comprising large private sector players and multinationals as well as large number of small units at the bottom of the pyramid. Most of the major capital goods are manufactured locally with a wide range of products. Indian companies lack export thrust as the focus is largely on the domestic market. Most items produced compare functionally with those manufactured elsewhere in the world, but lag in terms of the finished products. Focus on branding, marketing and customer orientation is comparatively low. The initiatives of the government towards FDI have also served as a catalyst to further raise the demand for engineering goods and machinery. Engineering industry attracts around 36% of the total FDI through an automatic route, subject to a limit of US$ 2 mn of lump sum payments. Removal of tariff protection on capital goods, delicensing of heavy electrical industry and allowance of 100% FDI, infrastructure development and reduction of custom duties on various equipments are some of the initiatives by the government, which have positively impacted the engineering sector. FDI inflows: Apr 2000-Jan 2012 Particulars ` bn US$ mn Electrical equipment , Miscellaneous mechanical and engineering , Industrial machinery , Non-conventional energy , Machine tools Medical and surgical appliances Agricultural machinery Earth-moving machinery Railway related components Industrial instruments Scientific instruments Boilers and steam generating plants Source:Department of Industrial Policy & Promotion I. Heavy Engineering Sector The heavy engineering sector includes electrical machinery/equipment and non-electrical machinery/equipment among others. Electrical machinery includes: power generation, transmission and distribution equipment such as generators and motors, transformers and switchgears. Non-electrical machinery comprises machines/equipment used in various sectors such as material handling equipment (earth moving machinery, excavators, and cranes) and boilers.

4 Growth in production of key heavy industries (%) Key heavy industries Unit Production (Apr 11 - Jan 12) Growth in Production (FY12 over FY11)* Machine tools ` bn Boilers ` bn Electric motors(exclphase-i) Th. H.P Rubber transmission and V belts ` bn Electric welding machines No. 10, (11.26) Power distribution transformers KVA 15,739, Commercial vehicles No. 748, Passenger cars No. 2,003, Relays, fuses and switchgears No. 27,567, (13.39) Air break switches / circuit breakers No. 83,162, Earth moving machinery No. 11, Cranes Tonnes 14, (2.71) Agricultural machinery ` bn Engines incl. internal combustion and diesel engine No. 1,302, Construction machine/equipment ` bn 3.39 (1.92) Industrial chains Tonnes 26, Industrial blowers No. 47, (3.65) Generator/alternator ` bn Turbines & accessories ` bn *Apr-Jan Source:Department of Industrial Policy & Promotion Heavy Electrical Indian heavy electrical segments have been closely linked to development of the power sector in India. The heavy electrical segment comprises of power generation, transmission and distribution as well as utilisation equipment. These include turbo generators, boilers, turbines, transformers, switchgears and relays, condensers and other allied items. This electrical equipment (transformers and switchgears) is used by most sectors. Some of the major areas where the equipment is used include power generation projects, petrochemical complexes, chemical plants, integrated steel plants and non-ferrous metal units. SMEs in the heavy electrical segment: Numerous companies have ventured into manufacturing of power equipment owing to the Government of India s thrust on power. The power equipment industry has a number of SMEs operating in fragmented segments such as manufacture of transformers, power cables and conductors. However, the segment continues to be dominated by organised players in the manufacture of heavy electrical equipment, which requires higher technological capabilities and capital investment. In power equipment, transformers are one of the most fragmented segments, with numerous SMEs involved in the manufacturing of transformers. The Indian transformer segment exports to more than 50 countries including the US, Europe, South Africa, Cyprus, Syria, Iraq and the Far East countries. Classification of heavy electrical segment: Turbines and Generator Sets: The Indian industry has established a manufacturing capacity of various kinds of turbines of more than 18,000 MW per annum. PSU companies have the largest installed capacity. There are units in the private sector also which manufacture steam and hydro turbines for power generation and industrial use. Domestic manufacturers of AC generators are capable of manufacturing AC generator from 0.5 KVA to 25,000 KVA and above. Boilers: The Indian boilers segment has the capability to manufacture boilers with super critical parameters upto 1,000 MW unit size.

5 Transformers: The domestic transformer segment has the capability to manufacture the entire range of power and distribution transformers. Special types of transformers required for furnaces, rectifiers, electric tracts, etc, and series and shunt reactors as well as HVDC transmission upto 500 KV are also being manufactured in India. The Indian transformer industry exports to various countries including the US, Europe, South Africa, Cyprus, Syria, Iraq and Far East countries. Switchgear and Control Gear: The switchgear and control gear segment in India manufactures and supplies a wide range of switchgear and control gear items required by the industrial and power sectors. The entire range of circuit breakers from bulk oil, minimum oil, air blast, vacuum to SF6 are manufactured to standard specification. The range of products produced cover the entire voltage range for 240V to 1000KV, switchgear and control gear, manual circuit breakers, air circuit breakers, switches, rewireable fuses and high rupture capacity fuses with their respective fuse bases, holders and starters. Electrical Furnaces: Electrical furnaces are used in metallurgical and engineering industries such as forging and foundry, machine tools, automobiles, etc. Shunting Locomotives: Shunting locomotives for internal transport facilities are essentially used in railways, steel plants, thermal power plants, etc. Heavy electrical and power plant equipment constitute as the main elements of the capital goods sector. The market size is around ` 1,210 bn, which is growing at about 14%. Two distinct segments are power plant equipment (mainly including boilers, turbines, generators) and electrical equipment for power transmission and distribution (power transformer, distribution transformer, switch gears, insulators, capacitors). The major power addition programmes, Restructured Accelerated Power Development and Reforms Programme (R-APDRP) and Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) and transmission projects have been major drivers of growth in electricity generation/transmission and the corresponding growth in equipment segment. Textile machinery The Indian textile machinery segment comprises more than 1,446 machinery and components manufacturers and 600 units producing complete machinery. The global market crisis that hit the textile industry in 2009 had a serious impact on the Indian textile machinery segment as well. Production in the overall textile machinery segment that grew at 18% CAGR over , declined by more than 30% in 2009, but showed signs of revival in Exports experienced a decline in 2009, which continued into 2010 as well. However, along with economic recovery, production and exports registered growth in FY11. Growth in production &exports of textile machinery, parts &accessories (%) Source: Office of Textile Commissioner & TMMA

6 Material Handling Equipment Under the heavy engineering sector, the Indian material handling equipment segment has a number of units present under MSME, manufacturing equipments such as stackers, reclaimers, ship loaders/unloaders, wagon tipplers and feeders catering to core industries such as coal, cement, power, port, mining, fertilisers and steel plants. Machine Tool Machine tool is another heavy engineering sector dominated by SMEs in terms of number of companies. The machine tool segment manufactures the entire range of metal-cutting and metal-forming machine tools; and variants of robotics, handling systems and TPM-friendly machines. Although machine tool manufacturing companies produce general purpose machinery of international standards in terms of quality, precision and reliability; they lag in terms of design and engineering capabilities to manufacture high precision CNC machines. It is a highly fragmented segment with growth in the segment being demand-driven, coming from various sectors such as automobiles, engineering, defence, textile machinery and aviation. However, India s share of machine tool production is at present only 0.8% of world production. At present, about 70% of the requirement of machine tools is met through imports, thereby offering domestic production ample opportunities. As per Planning Commission, GoI, the machine tool segment has the potential to grow from about 12% p.a. to 15-20% p.a. and thereby can either retain its share in domestic market at about 33% or can increase to somewhere around 50% by 2020 as visualised in the road map for the segment. To achieve a market share of about 50% by 2020, the segment will require around ` 150 bn for increasing the capacity. Cement Machinery The Indian cement machinery segment manufactures complete cement plants, based on dry processing and pre-calcination technology, for capacities upto 10,000 TPD. The existing installed capacity of the segment is estimated to be ` 6 bn p.a. Oil Field Equipment The oil field equipment segment manufactures drilling rigs for on-shore drilling. Offshore drilling equipments such as jack-up, rigs, etc are not manufactured indigenously. The segment, however, manufactures offshore platforms and certain other technological structures domestically. Bharat Heavy Electricals, Hindustan Shipyard, Mazagon Dock and Burn & Co. are some of the leading producers. The recent couple of years have witnessed a surge in exports of oil field equipments. However, the segment remains a net importer. Dairy Machinery The Indian dairy machinery manufacturers produce a wide range of equipment including stainless steel dairy equipment, evaporators, milk refrigerators and storage tanks, milk and cream deodorisers, centrifuges, clarifiers, agitators, homogenisers, spray dryers and heat exchangers (tubular and plate type), etc. As per the Ministry of Heavy Industries, presently, there are 20 units manufacturing dairy machinery and equipment such as evaporators, milk refrigerators, storage tanks, milk deodorisers, centifugers, clarifiers, agitators, homogenizers, spray dryers and heat exchangers, etc. in the organised sector, both in private as well as public sector. II. Light Engineering sector A majority of the SMEs operate in the light engineering sector, comprising low tech items such as castings, forgings, fasteners, bearings, steel pipes and tubes. Although SMEs are known to dominate the low technology segment in engineering, some of them also manufacture niche high value-added products. For a few SME engineering enterprises, manufacturing is restricted to assembly of imported components. Most products in light engineering serve as inputs for capital goods industry. Therefore, the industry s financial and operational health is linked to demand for capital goods. In fact, in light engineering, a number of products such as all types of fasteners (except high tensile and special purpose fasteners), conventional hand operated sewing machines, bicycle parts and other components are reserved for the SSI sector.

7 Snapshot of Key Segments in the Light Engineering sector Particulars Unit Production (Apr 11 - Jan 12) % Growth in Production (FY12 over FY11)* Bearings (Ball/Roller) No. 669,636, C.I. castings Tonnes 192, Steel castings Tonnes 215, Food processing machinery ` bn Fluorescent tubes No. 153,144, (10.15) Hose pipe ` bn 2.72 (24.59) Fasteners(high tensile)/bolts& nuts Tonnes 93, PVC pipes and tubes Tonnes 267, Aluminium tubes/pipes ` bn Spun pipes Tonnes 360, Stampings & forgings Tonnes 401, Bicycles No. 12,356, Bicycle parts ` bn Tube, truck No. 12,679, Medical and surgical equipment (except x-ray) ` bn 2.89 (13.47) * Apr-Jan2012 Source: Department of Industrial Policy & Promotion The major sub-segments within this sector are: Medical and Surgical Instruments The medical and surgical instruments segment includes a wide array of equipment and apparatuses. These include medical and surgical instruments, dental equipment, electro-medical apparatus, orthopaedic appliances, physiotherapy equipment, X-ray machines, among others. These instruments find application in diagnosis, therapy and patient monitoring and thus play a crucial role in the healthcare delivery system. Output of the Indian medical and surgical instruments segment was very small until a few years back. In recent years, liberalisation and growing health awareness has accelerated the growth of the domestic industry and also led to a rise in imports of medical and surgical instruments into India. Domestic production comprises of wide range of medical equipment including Electro-Cardiograph (ECG) machines, X-ray machines, electro-surgical instruments, blood chemistry analysers, among others. Demand for sophisticated instruments such as Nuclear Magnetic Resonance (NMR) scanners, multi channel monitors, among others are met through imports. Rising income levels, growing health consciousness, rapid urbanisation and rise of medical tourism are expected to drive the demand for medical and surgical instruments. Government s commitment to improve healthcare facilities and liberalisation of trade and investments laws would also expand the market for medical and surgical instruments. Process Control Instruments Process control instruments and systems are instruments and systems used for measurement and control of process variables. Process variables are physical or chemical parameters, the variations of which can affect the operation of a manufacturing process. These variables include humidity, pressure, temperature, liquid level, flow, vacuum, vibration, specific gravity, and chemical composition including ph, among others. Use of process control instruments and systems is highly significant in large and sophisticated process industries such as fertilisers, power plant, steel, cement plants, petroleum refineries and petrochemical industries, among others. 100% FDI is permitted in this sector. Transfer of technology has been the major cornerstone for the development of the domestic process control instruments and system industry. There exists a gap between technology adopted in India and contemporary international technology. Technology presently used in the Indian industry is microprocessor-based

8 centralised control system. The Indian industry is capable of handling open control systems and smart control devices; however, latest developments such as total integrated management and control approach, which are currently being adopted in the developed countries, are yet to be adopted in the country. Antifriction Roller Bearing Roller bearings are components used to reduce or eliminate friction between moving parts and thus reduce wear & tear of machines. They help improve machine performance and are thus a critical component of any equipment that rotates. It finds varied application, ranging from simple electric fans to complex space rockets. Depending on its usage, a bearing may have to withstand prolonged use, high speed rotation, varied temperatures, or a corrosive environment. Bearings are available in two distinctive shapes, ball, and roller. There are four different types of roller bearings cylindrical roller bearings, needle roller bearings, tapered roller bearings and spherical roller bearings. The Indian bearing segment has recorded healthy growth in the past few years. The Indian manufacturers are able to meet more than three-fourth of the demand for general purpose bearings. The Indian bearing industry s product range comprises of more than 500 types of bearings. Indian manufacturers do not produce special purpose bearings as demand for the same is low and investments required are huge, as bearings is a capital intensive industry. Special purpose bearings are therefore imported. The bearings industry is highly fragmented. The organised sector caters to both the original equipment manufacturers and replacement market. The unorganised sector, which manufactures low quality small bearings, caters to the replacement market. The manufacturing activity of a few MSMEs is restricted to assembly of imported components.the automobile industry is the major user industry for the bearings industry. Given the growing demand for automobiles in the country, demand for bearings is likely to increase in the coming years. Industrial Fasteners Industrial fasteners cover a wide range of products such as nuts, screws, bolts, studs, rivets, nails, washers, etc. Fasteners can be broadly classified into two groups, high tensile strength fasteners and mild steel fasteners, depending on their tensile strength. Manufacture of high tensile fasteners requires superior technology and these are hence mainly manufactured in the organised sector. On the other hand, manufacturing of mild steel fasteners is concentrated in the unorganised sector. In fact, manufacture of all types of fasteners except high tensile fasteners and special purpose fasteners are reserved for the SSI sector. Fasteners are used in the assembly of engineering systems. The automobile industry is the largest consumer of fasteners. The other major user-segments are textile machinery, railway locomotives, construction, computer hardware and general engineering. Ferrous Castings Ferrous castings constitute essential intermediates for automobiles, industrial machines, power plants, chemicals & fertiliser plants and cement plants, among others. They are therefore vital for the growth and development of the engineering industry. The domestic industry is well established, giving rise to a huge export potential for Indian manufacturers. To capitalise on this export demand, leading manufacturers have undertaken modernisation and upgradation of their manufacturing facilities to improve productivity and product quality and also reduce their production costs. Given the wide spread usage of castings across industries and the huge export potential, there exists considerable scope for establishing additional capacity in this area. Steel Forgings The forging segment has emerged as one of the major contributors to the manufacturing sector of the Indian economy. Depending on the scale of operations, the industry can be categorised as large, medium, small and tiny. SMEs comprise a major portion of this industry. Increasing globalisation has led to a sharp rise in investments in the sector. This has led to the industry becoming capital intensive from being labour intensive. To expand their markets and have a global reach, the small scale units are also increasing their capital investments. The small scale units have upgraded their facilities in terms of technology and quality

9 and a number of them are now suppliers to the OEMs in the automobile sector. The automotive industry is the major enduser of the forging industry. The other user industries include industrial machines, railways, oil & gas, power plants and chemical plants, among others. The Indian forgings industry has made rapid strides and currently not only meets almost the entire domestic demand, but has also emerged as a large exporter of forgings. The major export markets are the US, Europe and China. The outlook for the industry looks promising, backed by the robust demand from the automotive sector, both domestic and global. Seamless Steel Pipes & Tubes Seamless steel pipes & tubes find widespread usage in the hydrocarbon industries, processing & general engineering industries. Boiler pipes, as the name suggests are used in boilers, heat exchangers, super heaters, among others, while casing & tubing are used for drilling of oil and gas. Seamless pipes find application in industries where strength, resistance to corrosion and long shelf life are critical. The industry is liberalised and 100% FDI is permitted in the sector under the automatic route. The oil sector is the major end-user segment of seamless pipes & tubes. The other user segments include boilers, ball bearings, automobiles, chemical plants, fertilisers, petrochemical plants, industrial machinery, among others. With the gradual rise in power and oil sector, the demand for seamless steel pipes & tubes segment is expected to increase going forward. Electrical Resistance Welded (ERW) Steel Pipes & Tubes ERW steel pipes & tubes find widespread usage across industries and fields. In addition to various engineering industries, they are used for water, oil and gas distribution, line pipes, fencing, scaffolding, etc. They are also used for agricultural purposes, drinking water supply, thermal power, for hand pumps for deep boring wells and also as protection for cables (telecom), among others. Depending on the requirement of the end user industry, ERW steel pipes & tubes are available in various wall thicknesses, diameters, and qualities. The different types include line precision pipes, tubular poles, electric poles, lightweight galvanised pipes for sprinkler irrigation, among others. The industry has sufficient capacity to manufacture the different types of pipes & tubes. High performance ERW steel pipes & tubes possess high strength, toughness and are corrosion resistant. In the manufacturing process of ERW steel pipes & tubes, the edges to be welded are mechanically pressed together and electric resistance or electric induction is used to generate the heat required for welding. With the adoption of better welding technology, ERW pipes & tubes are now widely used in the oil & gas sector. A number of ERW steel pipes & tubes production units are in the SSI sector. Higher demand from the oil & gas industry, infrastructure and automobile industries has led to a healthy increase in production of ERW steel pipes. Submerged-Arc Welded (SAW) Pipes SAW pipes are mainly used for oil & gas transportation and water distribution. SAW pipes are of two major types, longitudinal and helical welded SAW pipes. The latter are used for low-pressure application, while longitudinal SAW pipes are preferred for high-pressure application such as gas pipes. Longitudinal SAW pipes are more than 25 mm in thickness. In terms of production costs, it costs less to manufacture helical SAW pipes as compared to longitudinal SAW pipes. In the manufacturing process of submerged-arc welded pipes, the heat necessary to melt the edges of metal to be joined together is generated with the help of a concealed arc with no pressure between the two sides of the weld. India has a high installed SAW pipes capacity with four major players including Jindal Saw Limited, Well Spun Gujarat, PSL and Man Industries. Bicycle and Bicycle Parts The Indian bicycle segment can be categorised into two segments, those manufacturing bicycle parts and those manufacturing complete bicycles. Majority of bicycle parts and components are manufactured in the small scale sector, since most of the components, other than free wheels and single piece hubs are reserved for the small scale sector. Large units are permitted to manufacture bicycle frames, chains, rims, and that too only for captive consumption. Complete bicycles are manufactured in the organised sector. The Indian bicycle industry conforms to well-accepted quality standards in the international market and more importantly, the industry is taking efforts to increase exports.

10 Fabrication Sector: Overview The fabrication sector forms a sub segment of the engineering industry and is one of the smallest in terms of turnover. This is a highly fragmented and labour intensive sector with medium & small scale industries heavily dependent on job work. Fabrication applies to the building of machines, structures and other equipment, by cutting, shaping and assembling components made from raw materials by using various mechanical processes such as welding, soldering, forging, brazing, forming, pressing, bending and stress removal. Welding is a major process input in most fabrication jobs. Since the demand for fabrication sector comes from the engineering sector, especially capital goods, the growth of fabrication industry largely depends on the overall industrial scenario. The fabrication industry mainly caters to the sectors such as transportation, packaging, consumer products, and construction. The major user industry for the fabrication sector is the general structural fabrication followed by the railway & shipping, machine building and construction. Transportation sector also continues to be one of the largest markets for sheet metal fabrication followed by construction. Major players in the fabrication sector in India are Larson and Toubro (L&T), Southern Structurals, Bellary Steels, Binny Engg., Triveni Structurals, Burn Standard and Ispat Profiles. The raw material for the fabrication industry is easily available in India, only special steel needs to be imported, which is cheaper than indigenously available steel. However, with prices of steel increasing on global and domestic level, slowing demand and manufacturers in the engineering sector planning a reduction in production capacity, the growth of this industry is likely to undergo a moderation in the near term. Future Outlook The engineering sector is expected to grow in the future and has a positive outlook owing to infrastructure development, favourable government policies and newinvestments in power projects, metals, oil & gas, and petrochemicals industries. Further industrial and manufacturing growth will boost growth in the engineering sector. As the export market offers more opportunities to explore, India s contribution in global engineering exports is expected to increase. Emerging trends like outsourcing of engineering services provide opportunities for growth. Engineering and design services such as new product designing, product improvement, maintenance and designing manufacturing systems are getting increasingly outsourced to Asian countries like India. It is estimated that by 2020 India can be a US$ 40 bn market for engineering outsourcing services. In addition, Department of Commerce has set a target of US$ 125 bn for engineering exports in Thereafter, for the remaining three years of the 12th Five Year Plan, based on a CAGR of 20% for the major sectors of engineering exports except Industrial Machinery, Electrical Machinery and Shipbuilding, the overall export target for engineering exports at the end of the 12th Five Year Plan has been set at US$ 222 bn. Thus, there are many opportunities for the Indian engineering sector. Production and growth rates projected in the 12th Plan (` bn) Particulars Market Size Domestic Production Domestic Production CAGR to (%) Projection production Production CAGR 12th Plan (%) Machine Tools Earth Moving and Mining Equipment Heavy Electrical and Power Plant Equipments Textile Machinery Metallurgical Machinery Process Plant Equipments Engineering Goods Source: Planning Commission, GoI

11 Section B: Food Processing Industry The food and agro industry is one of the largest sectors in India in terms of production, consumption and export and growth prospects. India has one of the largest arable lands in the world. It has diverse agro-climatic zones: hot and humid along the long coastal regions, dry and cold in the mountainous regions and hot and dry in plateau regions. This diversity makes India a unique destination for producing different kinds of horticultural and agro-products. Agriculture and allied sectors are estimated to have grown by 2.5% in FY12. In FY12, contribution of agriculture including allied activities to India s GDP at prices is around 13.9% with agriculture alone accounting for 12.3% followed by forestry and logging at 1.4% and fishing at 0.7%. Although the share of agriculture in GDP has shown a declining trend, but the importance of the sector to the economy cannot be undermined with the fact that it provides a vocation to about 70% of the population. The food processing industry is of great significance for the country s development as it is connected to the economy, industry and agriculture. It is one of the most diverse sectors of manufacturing, covering marine products, dairy products, fruits and vegetables, sugar, edible oils and beverages. During Apr-Nov 2011, it has grown at 17.2% as against 4.3% growth of the overall manufacturing sector. Currently, under manufacturing, food processing is one of the fastest growing segments accounting for about 27% of the average industrial growth. Rate of growth of output of some processed food products (in %) Particulars FY08 FY09 FY10 FY11 FY12* Sugar 15.2 (33.9) (6.0) Fruit pulp 87.0 (2.0) Fruit juices Cashew kernels 8.4 (4.2) (0.9) (7.9) 22.2 Instant food mixes Mineral water Chocolate Malted foods 8.5 (36.8) (8.8) Butter (22.7) (4.7) 0.1 Biscuits (0.9) (1.4) (1.6) Frozen meat (12.9) (21.8) (1.7) Note: * Apr-Dec Source: Economic survey Food processing involves any type of value addition to agricultural or horticultural produce and includes processes such as grading, sorting and packaging which enhance the shelf life of food products. The food processing industry provides vital linkages and synergies between industry and agriculture. The government has announced various fiscal reliefs and incentives, to encourage commercialisation and value addition to agricultural produce, for minimising pre/post-harvest wastage, generating employment and contributing to export growth. India s food processing sector covers a wide range of products such as fruit and vegetables; meat and poultry; milk and milk products, alcoholic beverages, fisheries, plantation, grain processing and other consumer product groups including confectionery, chocolates and cocoa products, soya-based products, mineral water, high protein foods etc. The food processing industry directly employs about 13 mn people and nearly 35 mn people indirectly. The food processing sector contributes over 14% of manufacturing GDP of which unorganised sector accounts for more than 70% of production in terms of volume and 50% in value terms. India annually yields 110 mn tonnes of milk, 150 mn tonnes of fruits and vegetables, 485 mn livestock, 230 mn tonnes of foodgrains, 7 mn tonnes of fish, 489 mn poultry and 45,200 mn eggs. However, in processing, India trails the developed and some developing countries by a wide margin. Only 2.2% for fruits and vegetables are processed in India as against 65% for the US, 78% for the Philippines and 23% for China. India s processing of 26% of marine products, 6% of poultry and 20% of buffalo meat is also lower as against 60 70% average for the developed countries.

12 SWOT Analysis of the Food Processing Industry Strengths Abundant availability of raw materials Easy penetration in rural areas due to competitive pricing Priority-sector status for agro-processing accorded by the central government Massive network of manufacturing facilities Vast domestic market Opportunities Bulky crop and material base offering vast potential for agro processing activities Setting up of SEZs/AEZs and food parks to incentivise development of greenfield projects Rising income levels and changing consumption patterns Favourable demographics and changing lifestyles Integration of development in contemporary technologies such as electronics, material science, biotechnology etc. offer vast scope for rapid improvement and progress Opening up of global markets Source: D&B Research Weakness Low availability of adequate infrastructural facilities such as cold chain, packaging, and branding Lack of adequate quality control and testing methods as per international standards Inefficient supply chain due to a large number of intermediaries High requirement of working capital Inadequately developed linkages between R&D labs and industry Threats Affordability and cultural preferences of fresh food Loss of trained manpower due to better working conditions in other industries Competition from global players High inventory carrying cost High packaging cost Export Market Trend in exports of food and agro products: FY08 to FY11 Source: APEDA Overall exports of food and agro products grew at four-year CAGR of 11% duringfy08 FY11 to ` bn in FY11. This growth was driven largely by superior growth of export of animal products such as buffalo meat, poultry products, animal casting and other processed foods growing, which grew at more than 20% each. The contribution of animal products to exports registered an upward trend from 16% in FY08 to 23% in FY11 whereas the contribution of cereals declined from 47% in FY08 to 33% in FY11 mainly due to export ban on non-basmati rice, export duty on basmati rice, and restrictions on private participation in wheat purchases.

13 Segment-wise major export destinations Floriculture Segments Fresh Fruits & Vegetables Processed Vegetable and Fruits Animal Products Cereals Source: APEDA Major markets US, Netherlands, UK, Pakistan, Germany, Japan, Ethiopia, Italy, Bangladesh UAE, Netherlands, UK, Pakistan, Bangladesh, Malaysia, Saudi Arabia, Sri Lanka, Malaysia, Qatar US, UK Malaysia, Netherlands, Philippines, Germany, Pakistan, Canada, Nepal, Russia, China, Australia, France, Angola, Belgium, Singapore, Yemen, Thailand Kuwait Egypt, Philippines Kuwait, Iraq, Angola, Jordan, Oman, Congo, US, Afghanistan, Vietnam, Malaysia, Saudi Arabia Vietnam, Malaysia, Bangladesh, Yemen, US, UK, Taiwan, Indonesia Sudan, Singapore, UAE, Iran, Kuwait, Saudi Arabia Schemes for Technology up-gradation, establishment and expansion of FPIs Government of India (GoI) has implemented schemes for upgrading technology and expanding and modernising the food processing industries to attract potential entrepreneurs. The table below indicates the financial assistance released by the Ministry for food and agro products. Financial assistance for food and agro products Segment/Year FY09 FY10 FY11 (Dec 2010) Fruits & Vegetable Processing NA NA Meat Processing (As on 28/2/11) Diary Processing NA NA Fish Processing NA NA 12.6 Grain Processing - Oil (As on 24/1/11) Pulses Flour Alcoholic Beverages NA NA 27.3 Consumer Industries Source: Ministry of Food Processing Industry Foreign direct investment policy The country s food processing market is opening up to a wide range of investors across the globe. Government is also actively encouraging investment in agro processing industries to reduce wastage and boost value addition. As per extant policy, FDI up to 100% is permitted under the automatic route in the food infrastructure (Food Park, Cold Chain/Warehousing). Foreign participation of up to 100% for most processed items except alcoholic beverages and items reserved for small scale units has also been approved by GoI. The four-year period between FY07 FY10 witnessed stupendous CAGR growth of 44% for the food processing industry wherein the FDI inflows to the sector increased from ` 4.4 bn in FY07 to 13.1 bn in FY10. However, the momentum was lost in FY11 when FDI inflow declined 34.7% to ` 8,580 mn.

14 FDI inflows in food processing Source: National Institute of Food Technology Entrepreneurship and Management, MOFPI & D&B Research Credit deployment by the scheduled commercial banks to the food processing sector has also shown a growing trend over the period of past few years. As per RBI, the total bank credit outstanding to food processing sector stood at ` bn as on Dec 31, 2011, 17% higher than the amount as on the same period previous year. Outstanding bank credit includes any principal amount which has become due from the units which must have not repaid the amounts. The share of food processing sector in the total credit outstanding to all Industries stood at 4.96%, almost the same as during the previous year. Credit deployment to food processing industries Source: Ministry of Food Processing Industry, D&B Research Eleventh and twelfth five year plan The total plan outlay of the Ministry rose from ` 6.5 bn during the 10th Plan to ` 40.3 bn during the 11th Five Year Plan. In the 11th plan, maximum increase in the outlay was seen under Scheme for Infrastructure Development, wherein the plan outlay has increased from ` 1.8 bn in 10th plan to ` bn. The scheme-wise outlays for 11th Plan are given below:

15 Total Outlays for the 11th Plan period ( ) (` bn) Scheme for Infrastructure Development Scheme for Technology Up-gradation/Establishment/ Modernisation of Food Processing Industries 6.00 Scheme for Quality Assurance, Codex standards, R&D and promotional activities 2.50 Scheme for Human Resource Development 0.65 Scheme for strengthening of institutions 3.25 Scheme for Up-gradation of Quality of Street Foods 1.78 Source: Ministry of Food Processing Industry, D & B Research The 11th Five Year Plan approach was mainly driven by Vision 2015 which focused on increasing level of processing of perishables, value addition and share in global food trade. The plan included various new components such as promoting the spirit of public private partnership and integrated approach with appropriate emphasis on backward linkages. The major thrust areas of the 11th five year plan were development of value chain and processing infrastructure, upgrading or modernisation of technologies, promoting quality certification and standards, strengthening of institutional mechanism for skill development etc. Some of the policy measures and initiatives taken by GoI during the plan period include: Most processed food items have been exempted from the purview of licensing under the Industries (Development & Regulation) Act, The industry is included on the priority sector list facilitating easy availability of finance. Excise duty levied on ready-to-eat products, instant food mixes, aerated drinks and fruits and vegetables processing units have been reduced. GoI has approved foreign participation of up to 100% for most processed items except alcoholic beverages and items reserved for small scale units. A large number of foreign collaborations have been approved. Excise Duty of 16% on dairy machinery has been completely waived off and excise duty on meat, poultry and fish products has been reduced from 16% to 8%. Tax concessions (100% IT deduction for 5 years and 25% in next 5 years for new agro processing, waiver of excise duty on dairy machinery, zero input duty on EOUs etc) External commercial borrowings to be available for cold storage Launching of National Mission on Food Processing Capital investment in creation of modern storage capacity eligible for viability gap funding Ministry of Food Processing industries also formulated appropriate policies and implemented many schemes targeted to infrastructure development, technology upgradation, quality assurance, reduce wastage and increase value addition in the value chain. Major schemes implemented by the Ministry of Food Processing Industry Infrastructure development Mega Food Parks (MFPs) 10 MFPs were approved in the first phase Five MFPs were approved in the second phase Proposals have been invited for additional 15 MFPs Each of these MFPs is likely to consist of food-producing units in the cluster Cold chain, value addition and preservation infrastructure Eight of the 10 projects approved in the first phase in have started commercial production. 39 projects approved in the second phase in Likely to reduce wastage especially among perishable food products. Modernisation and setting up of abattoirs 10 projects assisted so far with a grant assistance of ` mn as on Jan Focusses on hygienic and more humane slaughtering of animals.

16 Technology up-gradation, establishment/modernisation of FPIs 852 units have been assisted with a grant of ` 1,358.7 mn during FY12 (Apr-Jan) Quality assurance, codexs standards, R&D, and promotional activities in FY12 Five projects for setting up/upgradation of food testing labs approved Two proposal for implementation of HACCP/ISO certification of units approved Eight proposals for R&D approved Human resource development during FY12 One proposal for creation of infrastructure facilities 25 proposals for setting up of Food Processing Trading Centres (FPTCs) 122 entrepreneurship development programmes have been held Strengthening of institutions as centres of excellence. Following have been strengthened: Indian Institute of Crop Processing Technology, Thanjavur National Institute of Food Technology and Entrepreneurship Management, Kundi, Haryana Indian Grape Processing Board National Meat and Poultry Processing Board Source: Economic Survey For the 12th Five Year Plan ( ) greater emphasis would be laid on decentralised process of implementation with greater involvement of states in selection of projects and monitoring their implementation. In this five year plan, major thrust would be on addressing critical issues impacting the value chain in the sector by focusing on policy making and coordination instead of project implementation, so as to. Also, the existing focus on infrastructure development will be continued with the expansion of scope and depth so as to ensure sustainability of the value chains. Some of the key recommendations of the working group for the 12th plan activities include: Setting up of National Mission on Food Processing to improve coordination and implementation of schemes and to enable greater involvement of state governments. Expanding and modifying existing infrastructure development schemes New Mega Food Parks Additional cold chain projects Establishment of new abattoirs and modernization of existing abattoirs Develop and strengthening of existing and new institutions Taking up a nationwide skill development program along the lines of special projects for skill development of rural youths under SGSY of MoRD. Putting in place a network of food testing labs (Government/ Private) by providing incentives. Encouragement for larger participation in Codex deliberations and setting up of Codex Cell to promote, coordinate and monitor related initiatives at the level of stakeholders such as industry associations, national research institutions etc. Setting up of an Innovation Fund and Venture Capital Fund for Food Processing to promote innovations and technology development as well as to support conversion of the innovations into viable business opportunities. The total outlay of ` bn for the 12th plan period has been proposed. During 12th plan, scheme for Mini Food Parks is being proposed to provide for a maximum grant of ` 200 mn, over a minimum area of 30 acres which may facilitate setting up of 15 such Mini Food Parks. It has been proposed to support 120 more integrated cold chain projects, out of which 20 projects would be of irradiation facilities. During the 12th plan, establishment of 90 new abattoirs and modernisation of 150 existing abattoirs has also been proposed out of which 40 abattoir projects would be taken up during first two years of the 12th Plan, which would include 20 projects for setting up new abattoirs and 20 projects for modernisation of existing abattoirs. In the field of strengthening of institutions, establishment of 10 regional centres for National Institute of Food Technology Entrepreneurship & Management (NIFTEM) and 8 Indian Institute of Crop Processing Technology (IICPT) centres across the country has been proposed. Issues and Challenges Although food processing industry in India is enjoying the benefits of diverse and rich resource base and locational advantage, there are many constraints which the industry is facing some of which include non-availability of adequate critical infrastructural facilities, like cold chain, packing and grading centres, lack of adequate quality control and testing infrastructure, inefficient supply chain, insufficient credit supply, obsolete machinery, lack of skilled manpower, high

17 taxation, high packaging cost, high inventory carrying cost affordability and cultural preference for fresh food. Besides, presence of fragmented industry players and multiple laws also pose barriers to the growth prospects. Strict maintenance of quality standard, labelling and traceability and increasing competition are some of the threats faced by this industry. The Road Ahead India has the potential of becoming one of the largest producers in the food and agricultural sector globally. The country is endowed with a large production base for a variety of food crops due to its varied agro-climatic conditions. To realise the vast potential of Indian agriculture, enhance the farmer s income, generate employment opportunities, provide choice to consumers at affordable price and contribute to overall national growth, GoI, through the Ministry of Food Processing Industries, has adopted Vision 2015 which envisages: Increasing level of processing of perishables from 6% to 20% Enhancing value addition from 20% to 35% Increasing share in global food trade from 1.5% to 3% The initiatives identified for development to provide support and thrust to the food processing industries in India include: establishing Mega Food Parks; modernised abattoirs, cold chains and infrastructure for preservation of foods, upgrading safety and quality of street food and establishing and upgrading quality control laboratories.