Indian COMPaniES In THE 21ST CEnTURY

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indianCOMPANIESIN THE21STCENTURYMohammed Saqib, The Rajiv Gandhi FoundationRajesh Sehgal and Dennis Pamlin, WWF

indiancompaniesin the 21stcenturyAn opportunity forinnovationsthat cansave theplanetA survey by WWF’s Trade and Investment ProgrammeMohammed Saqib, The Rajiv Gandhi FoundationRajesh Sehgal and Dennis Pamlin, WWFindian companies in the 21st century

contentsEx ecuti ve Su m m a ry1 . I ntro d u ctio n7142. The Indian context192.1 The Indian economy202.2 Indian companies232.3 An overview of corporate activities26for the environment in India3. Th e W W F su rvey 313.1 The process 323.2 Survey findings 334. Possible ways forward for different actors 394.1 Indian companies404.2 The Indian government and authorities414.3 Foreign governments and companies435. Three initiatives to explore435.1 Sustainability as a driver for innovation445.2 Export of environmental goods and services485.3 a brics axis for global sustainability56APPENDIX endnotes61Appendix 1 - Companies approached62Endnotes64

This report is part of a series of studies byWWF’s Trade and Investment Programme,which aims to identify and cooperate withactors in the BRICS group of key emergingeconomies (Brazil, Russia, India, China andSouth Africa) to champion sustainableinternational trade and investment. TheProgramme examines the scope whichexists for these countries to become leadingexporters of, and investors in, sustainablegoods and services, whilst emerging as keyactors in promoting a proactive internationalsustainable development agenda.For more information see: www.panda.org/investmentor email: trade@wwfint.org

executivesummary

India is currently the world’s fourth largest economy in terms of real GDP (PPP)and the tenth largest economy in terms ofnominal GDP.1 Over the last decade, thecountry has emerged as a leading actoron the international stage. 2 India’s role inboth the WTO and the UN has often beenthat of bridging the divides between Northand South, East and West, building on along historic tradition.3 The outsourcing ofservices to India has over the past decaderedefined the international business environment, and major Indian companies arenow moving abroad on a scale never beforewitnessed.4In a situation where the world requires innovative companies to addressthe serious global challenges faced by humanity, including high resourceconsumption, pollution, population growth, demographic and geopoliticalchanges, India, with its rapidly changing business environment, may indeedprove to be one of the most important countries on the planet over the nextseveral decades. 5This report shows that there exists significant interest within the Indianbusiness sector in sustainable development and innovative solutions that canbe applied to achieve this goal. The approaches utilised in this regard by leaders in the Indian corporate sector are well ahead of many of their westerncounterparts, which are often, and often erroneously, viewed as leaders in thefield of corporate social responsibility (CSR). A number of common denominators exist within the progressive approach of these Indian companies, andthese have been collectively referred to by one Indian company as “third generation CSR”. indian companies in the 21st century

This third generation CSR is an approach where companies look to ensurethat their core businesses deliver sustainable development results. This differs from the first generation of CSR, that looked at philanthropy as one wayof using profits, and the second generation that was searching for ways ofminimizing the negative impacts of the companies’ operations.The most important element of the third generation CSR is that it examinesthe core activities of a company and determines means by which the companycan evolve in order to ensure that it contributes to welfare, even if this does nottranslate into immediate returns. This approach means that environmentaland social concerns are the starting point for the business activity, as opposedto being factored in at the end. Rather than compromising on profit, companiesprovide information that allows government to proactively change businessregulations in order to reward companies which deliver on social and environmental objectives, such as reducing the use of natural resources.In order to ensure that Indiancompanies can further develop“India is not endowed with sufficient natural capitalthis “third generation CSR”, it isin comparison to the population it supports. Thoughvital that proactive leaders workIndia is home to 18% of the world’s population, it onlytogether. The Indian business comhas 2.4% of the planet’s landmass, 4% of the fresh wamunity must itself find ways to enter resources and about a percent of the world’s forest.courage this development, and theIndia’s ecosystems are already highly degraded. MostIndian government should ensureIndian rivers have water quality unfit for direct humanthat leaders in the corporate sectoruse. Air quality in Indian cities is degrading despiteare rewarded. The NGOs in Indiasignificant improvements in emissions from vehiclesmust also be involved in these procand industries. The country however continues to reesses, in order to promote transparmain on the threshold of a grave ecological crisis.ency and to ensure that companiesThe current paradigm of rapid economic growthwhich deliver are rewarded. Finally,along with the need of conserving the natural andand not least importantly, foreignecological resources, challenges the very foundationgovernments and companies mustof the manner in which business is done today. It chalsupport these Indian firms throughlenges the traditional business management theory,whatever means at their disposal,which echoes Milton Friedman’s famous statement thatfrom direct measures such as pubthere is ’only one responsibility of business: to use itslic procurement and supply chainresources and engage in activities designed to increasemanagement, to indirect measuresits profits.’such as Research and DevelopmentThe fact that rapid economic growth is the only re(R&D) and changes in Intellectualalistic means to lift the poor out of extreme poverty andProperty Rights (IPR) legislation.6the fact that most economic activities depend on prodExisting initiatives, such as theuct and services provided by the ecosystems, necesCII-Sohrabji Godrej Green Businesssitates the ushering of a new business paradigm whichCentre, provide an interesting openables rapid economic growth without compromisingthe capacity of the ecosystem to sustain, nurture andfuel economic development and human well-being.”www.cii-sustainability.org/indian companies in the 21st century

portunity to strengthen the third generation CSR.7 The vision of CII-GodrejGBC is to “Make India a Leader in Green Businesses by 2015”.Unlike the majority of countries in the world, many in India exhibits anunderstanding of the magnitude of the challenges it faces, but also a willingness to turn these challenges into business opportunities.One of the most important areas to explore concerns the opportunity todevelop an “axis for sustainable development” between India and China. Thedirection in which the relationship between these two giants will move in thefuture, will to a large degree determine the future of global sustainable development. Collaboration between India and other emerging economies willalso be crucial.Overvie w o frespo nsesto th equ estio n ai re 9i. The survey shows that a group of companies exists in India which hastaken on a leadership role in corporate sustainability. Of the respondents,more than three quarters (76%) answered that they comply with environmental regulations and judicial decisions, while 20% felt that they exceedthese standards. Four percent of the companies admitted to non-compliance with environmental regulations.ii. When asked “How would you rate Indian companies in general in termsof abiding by the laws and policies for environmental protection”, 66%replied that either “many” or “very many” are “breaking laws”. In comparison, 44% replied that “few” or “very few” are “breaking laws”. Forthe category “going beyond” 83% replied that “few” or “very few” do this,compared with the 17% who replied that “many” or “very many” do this.This, together with the fact that many of these companies also requeststronger penalties for non-compliance, indicates a perception by companies that compliance with environmental regulations is costly to them, andthat competitors that are non-compliant must be dealt with.10iii. The contrast between what the companies report as their own behaviourand how they perceive other companies is striking. This discrepancy couldbe explained by a number of factors. Firstly, the nature of the surveypresumes a degree of self-selection, since those companies responding tothe questionnaire are likely to be more interested in sustainability issuesthan the average company, and the results can therefore not simply be extrapolated to the Indian business sector as a whole. Secondly, companiesmight overestimate their own performance and underestimate their competitors’ performance. Thirdly, media reports will tend to focus on thosecompanies guilty of breaking the law, rather than those going beyond therequirements, thereby creating an impression that non-compliance ismore common than is in fact the case.10indian companies in the 21st century

iv. Among the respondents which are directly engaged in the import, manufacturing, sales or service of energy efficient energy products, 77% felt theneed for the Indian government, or an industry association, to develop andmarket an Indian certification scheme.v. Close to three-quarters (73%) of the companies that participated in thesurvey, expressed a willingness to cooperate with an organisation such asWWF in order to promote sustainable development, both within India andinternationally.possiblew ays fo rw a rdIndian companies:i. Leading companies could work with the government i n order to ensurethat an overarching investment and export framework is developed, thatsupports proactive companies contributing to sustainable development.ii. Leading companies could develop models that help to translate sustainability trends, such as reduced resource utilisation, into profitable businessstrategies.iii. Leading companies could develop concrete projects that support sustainable development in India and abroad, especially in the BRICs countries,implement these and communicate the results to key stakeholders. Theseprojects should be linked to the core business of the companies.The Indian government and authorities:i. The possibility to develop a sustainability index for the stock marketshould be explored.ii. The Indian government and authorities could develop a system to distinguish between sustainable and unsustainable trade, building on existingwork in fields such as the “project based approach” for environmentalgoods and services in the WTO, where the Indian government plays a global leadership role.iii. Enforcement of the norms and regulations to protect the environment mustbe improved, in order to ensure compliance and avoid a situation where noncompliant companies are advantaged over those following the law.indian companies in the 21st century11

iv. A process could be initiated that supports proactive companies and ensures that other companies do not lower environmental standards withinthe country and thereby tarnish the general reputation of Indian productsin the international market. Such a process could include the following instruments:- Incentives, including financial ones – Companies that go beyond existing regulation should be rewarded accordingly- Disclosure, including mandatory rules – Basic environmental information should be disclosed, preferably in line with internationally agreedstandards such as the Global Reporting Initiative (GRI). Existingstandards must also be met. Progressive companies must be allowedthe opportunity to identify areas where reporting needs are mostacute, while non-companies could be exposed, for example on a nationalblacklist. Initiatives such as the Global Reporting Initiative and theCarbon Disclosure Project should be encouraged.v. The government could develop economic instruments that promote environmental responsibility amongst small and medium enterprises, sincesuch companies often do not possess the necessary resources to translatesustainability trends into business opportunities.vi. New concepts such as sustainable urbanisation, green buildings and sustainability as a driver for innovation are beginning to take hold in India.Government agencies should therefore explore ways in which to supportthese initiatives. Where possible this should be done together with otheremerging economies such as China, Brazil, Russia and South Africa.vii. The government could play a more active role in the development of regulations affecting Indian business in other regions, such as the EU and China. For example, the Indian government could provide suggestions for theimplementation of sustainable development concepts such as decreasedresource utilisation, reduced pollution and reduced CO2 emissions.12indian companies in the 21st century

Foreign governments and companiesi. For each of the recommendations to Indian companies and the Indian government, foreign governments and companies could explore ways to support those Indian companies taking the lead on sustainable development.ii. Foreign governments could explore ways in which their domestic rulesand regulations could be amended to support the importation of sustainable goods and services from India, for example through the implementation of sustainable procurement practices.Th reei ni ti ati vesto explo reIn order to explore the potential of Indian companies to play a more prominentglobal role in providing sustainable welfare, WWF will develop three initiatives that directly support the majority the ‘steps forward’ presented above.1. Sustainability as a driver for innovation and profitThis initiative will explore ways in which Indian companies can translate global sustainability challenges into profitable business opportunities.2. Export of environmental goods and servicesThis initiative will explore ways in which to define, identify and support thoseproducts, services and projects that contribute to sustainable development. Itwill develop a model that can be used to guide economic decision-making andinform trade and investment negotiations.3. BRICs Axis for sustainabilityThis initiative will explore opportunities for a creation of a “BRICs axisfor sustainability” that can provide leadership as well as goods andservices to the world market.The three initiatives are described in more detail in Section Five below.indian companies in the 21st century13

14indian companies in the 21st century

1.introduction

The Indian economy grew at 6 percent perannum from 1980 to 2002, at 7.5 percentper annum from 2002 to 2006 and during2005/06 the economy grew 8.4 percent.11 12At the beginning of 2006 the Indian economy is growing with by approximately 8percent, making it one of the world’s bestperforming economies for the past quartercentury.1316indian companies in the 21st century

In the recent past, much of the discussion regarding India’s role in the global economy has been within the context of China, which is viewed as thepredominant emerging market in the world, with India second.14 An increasing number of experts, however, are of the opinion that India might surpassChina in economic terms by 2040, due, amongst other reasons, to a betterinnovation climate.15 In this regard the most important question, of course, isnot which of China or India will emerge as the more dominant economy, butrather whether these two emerging superpowers can work together towardsachieving the goal of sustainable development?16Significant investments in infrastructure are planned, but many of themare following unsustainable western development models that are resourceinefficient and unable of delivering an equitable distribution of welfare.17Over the next decade it can be assumed that attention will gradually shiftfrom the current dominant economies of the EU, Japan and the US, to theChina-India axis as these countries become economically more powerful. Thedirection in which China and India moves is set to significantly influence themovement of the world economy as a whole.18The increasingly prominent role of the private sector in the global economic arena, raises the question of how the focus can be shifted from mitigationof environmental impacts through implementation of minimum standards, tothe promotion of leadership and solutions that deliver the sustainable goodsand services the world requires. In the case of energy, for example, whatsteps are required in order to move beyond mere incremental improvementsin efficiency and reduced emissions in the power sector, to the implementationof innovative and sustainable approaches such as technology-based alternatives to business travel and new urban planning models?19The report is divided into four main sections. The first provides an overview of the current Indian situation, while the second present the results ofthe WWF-India survey. The third section presents possible ways forward fordifferent actors, and the final one discusses three initiatives that WWF wouldlike to explore further with relevant actors in India.The survey and research for this report was undertaken by a team fromthe Rajiv Gandhi Foundation (RGF), 20 led by Mohammed Saqib. The interpretation of the results and recommendations was done by Rajesh Sehgal andDennis Pamlin from WWF, together with the RGF. The suggestions for waysforward were developed by Rajesh Sehgal and Dennis Pamlin, with valuableinput from the RGF, Ravi Singh, Sejal Worha and WWF’s Trade and Investment Programme team.indian companies in the 21st century17

18indian companies in the 21st century

2.the indiancontext

2.1 The Indian EconomyIndia’s economy is growing fast. With anannual growth rate of 8 percent, risingforeign exchange reserves of close to US 140 billion, increasing foreign direct investment (FDI) of close to US 8 billion,and a more than 20 percent increase inexports, the country’s position as anemerging economic super power is easyto understand. 22India’s population is estimated at nearly 1.1 billion and is growing at 1.6 percent a year. India is currently the world’s fourth largest economy in terms ofreal GDP (as measured in PPP terms) and the tenth largest economy in termsof nominal GDP (as measured according to market exchange rates). 23 Services, industry and agriculture account for 51.4 percent, 28.1 percent, and 20.6percent of GDP respectively. Nearly two-thirds of the population depends onagriculture for its livelihood. 24India’s Macro Economic Indicators (As of March, 2006)21Population (July 2006 est.)1,095,351,995GDP at factor cost Q3(2005-06)Rs. 6,95,382 crorecalculated at constant pricesCrore 10 millionPer capita GDPGDP (PPP basis) (2005 est.)US 543US 3.699 trillionPer Capita GDP (PPP basis) (2005 est.)US 3,400GDP growth rate in 2005-06 Q2 (July-Sep)GDP growth rate in 2004-057.5%GDP growth rate in 2005-06 (projected)8.1 %Composition of GDPServices :51.4 %Industry :28.1%Agriculture:20.6%Inflation as on February 4, 2006Exchange rate RS to US 208%4.1%Rs 44. 74 (April 12th, 2006)Food Grains Production (2005-06)209.3 million tonnesFood grains buffer stocks (December 1, 2005)18.76 million tonnesindian companies in the 21st century

I n di a’sFo reig nTra d e :Indian Foreign Trade: A snapshot(2005-06)Total Foreign Trade 215 BnExports 88760.40 Mn26.34% increase from 2004-05Imports 126336.01 Mn33% increase from 2004-05Trade Deficit 37575.61 MnHigher than 24739 Mn in 2004-05Forex Reserves 143.774 BnExceeded the forex reserves of USA,France, Russia and Germany.India’s foreign trade data released by the Ministry of Commerce and Industry for the period 2005-06 (April-February) indicates the following: 25 During 2005-06 (April-February), India’s merchandise exports grew by26.6 percent (25.5 percent previous year). Imports grew by 33.1 percent during April-February 2005-06 (35.3 percent previous year). Imports of petroleum, oil and lubricants (POL) during April- February2005-06 increased by 49.3 percent (44.1 percent previous year). The growth of non-oil imports was 26.8 percent during April-February2005-06, following the 32.2 percent growth the year before. The trade deficit expanded by 51.7 percent to US 37.4 billion duringApril-February 2005-06, from US 24.7 billion the year before, due to anincrease in both oil imports (increased by US 13.1 billion) and non-oilimports (increased by US 18.3 billion). During April-December 2005, thenon-oil trade balance reflected a deficit of US 8.7 billion, compared with adeficit of US 3.3 billion the year before.Foreign Debt (Qtr ended December 2005)Foreign Debt as Percentage of GNP (April 2006)US 119.2 billion22%FDIJanuary 2006US 647.7 millionJanuary 2005US 152 millionFII investment (net inflows)(April-December 2005)US 5.1 Billion(April-December 2004)US 4.7 Billionindian companies in the 21st century21

The US is India’s largest trading partner, with bilateral trade between Indiaand the US in 2005 standing at US 26.8 billion. 26 The Foreign Direct Investment (FDI) inflows from the US constitute about 11 percent of the totalactual FDI inflows into India. 27 Proposals for foreign direct investment intoIndia are considered by the Foreign Investment Promotion Board and generally receive government approval. Foreign investment is particularly soughtafter in power generation, telecommunications, ports, roads, petroleum exploration/processing, and mining.En ergy i nI n di aIn every country, energy policy and the investments which occur in this sector, are closely linked to issues such as climate change, local pollution, welfarecreation, national security and public participation in key decisions. The manner in which such policies are formulated and implemented will therefore playa significant role in shaping the societyWith a gross domestic product (GDP) growth of 8 percent set for the TenthFive-Year Plan (2002-07), the energy demand is expected to grow at 5.2 percent. Although, the commercial energy consumption has grown rapidly overthe past two decades, a large part of India’s population does not have accessto electricity. At 479 kg of oil equivalent (kgoe), the per capita energy consumption is even lower than some least-developed countries. 28India has significant domestic energy resources, both non-renewable (particularly coal) and renewable.The geological coal reserves of the country are estimated at 220.98 billiontones (bt) as on January 2001. India has an estimated 1000 billion cubic meters of Coal Bed Methane (CBM), which is likely to emerge as a new source ofcommercial energy in the country. The current estimates of geological lignitereserves in India are 34.76 bt spread over Tamil Nadu and Pondicherry (87.5percent), Rajasthan (6.9 percent), Gujarat (4.9 percent), Kerala (0.31 percent)and Jammu and Kashmir (0.37 percent). The lignite deposits in the southernand western regions have emerged as an important source of fuel supply forstates like Tamil Nadu, Rajasthan and Gujarat. Over the years, considerableemphasis has been placed on the development of lignite for power generation.Lignite production is likely to increase from 24.3 million tones in 2001-02 to55.96 million tonnes in 2006-07. 29Despite the resource potential and the significant rate of growth in energy supply over the past several decades, India faces serious energy shortages. This has led to a reliance on increased imports in order to meet thedemand of oil and coal. Current projections indicate that India’s dependence22indian companies in the 21st century

on oil imports is set to increase. 30 The demand for natural gas also exceedssupply and efforts are being made to import natural gas in the form of liquefied natural gas (LNG) and piped gas. The power sector has also been experiencing severe power shortages. 31In India, coal occupies a dominant position, constituting approximately51 percent of India’s primary energy resources, followed by oil at 36 percent,natural gas at 9 percent, nuclear at 2 percent and hydro-power at 2 percent. 32In traditional scenarios, the current resource mix is expected to changeslightly through the forecast period ending in 2010. Coal is projected to remain roughly the same as in 1995, while hydro (14%) and natural gas (10%)will have higher shares of total production. Oil production will however decline sharply to a 9 percent share. 33Up to this point, no real attention has been paid to a demand-driven approach, wherein India would consider major investments in intelligent energysystems based upon smart urban planning and renewable energy supply.Such an approach could also result in significant export opportunities.2.2 Indian companiesIndia’s companies have steadily increased their level of activity in the globalarena following the opening up of the Indian economy in 1990-91. The Indianbusiness arena has experienced rapid changes in recent years, with economicprogress linked to the explosion in information technology (IT), accompaniedby the globalisation-induced blurring of national boundaries. In this environment, India has established itself as an outsourcing hub for major internationalcompanies such as IBM, General Electric, Hewlett Packard and many others. 34The number of Indian companies investing abroad has been growingsteadily since the Tata Group’s acquisition of the UK’s Tetley Tea for US 430million in 2000. 35 According to KPMG, Indian companies invested US 1.7billion outside the country in the first eight months of 2005, acquiring 62 overseas companies. 36According to a report by the Associated Chambers of Commerce of India(ASSOCHAM), the Indian IT sector leads the way in terms of outward investment, accounting for almost 17 percent of all foreign acquisitions betweenApril and July 2005. Other significant sectors in this regard include bankingand insurance (13%), pharmaceuticals(13%) and fast moving consumer goods(FMCG) (8%). Other economic sectors active in terms of foreign acquisitionsinclude media, telecommunications, engineering, metals, automotives, textiles, paper, infrastructure, hotel, packaging and chemicals. 37indian companies in the 21st century23

While software export revenues currently comprise 2.5 percent of GDP,this figure is expected to increase to between 6 and 7 percent of total GDPby 2008.38“The time is now.to be in India. This is perhaps the most optimistic I’ve feltabout India in the last 10-15 years.”Jeffrey Immelt, President and CEO, General Electric Company39Lea di n gI n di a nco m pa ni es24UNCTAD’s World Investment Report 2005 ranked India as the second mostattractive investment destination, after China, among trans-national corporations.40 The country is also the most attractive location for “off-shoring’’of services, activities according to A. T. Kearney’s Global Services LocationIndex, 2005.41India has emerged as the fastest growing and fourth largest IT market inthe Asia Pacific region. The total value of the IT industry is expected to reachUS 53.2 billion by 2008, compared to US 18.7 billion in 2003, a compoundedannual growth rate (CAGR) of 23.1 percent. 42With the strong growth of the Indian Information Technology EnabledServices – Business Process Outsourcing (ITES-BPO) sector both on-shoreas well as offshore, export revenues from this sector have increased rapidly,by 44 percent in 2003-04 and further 41 percent in 2004-05.43 The output ofthe Indian electronics and IT industry increased by 25.4 percent to US 33billion during 2004-05, from US 26 billion in 2003-04.44Services exports grew by 71 percent in 2004-05 to US 46 billion, and bya further 75 percent in April-September 2005. In 2004-05, software serviceexports grew by 34.4 percent, and by 32 percent in the first half of 2005-06.45India is sometime seen as the world’s IT laboratory, where global IT giantssuch as Google, Yahoo, Intersil, IBM, Nokia and Microsoft are investing inR&D activities.46In terms of Indian companies, Infosys was ranked ninth by Price Waterhouse Coopers (PWC) in the list of World’s Most Respected Companies inIT, sharing the list with HP, IBM, Dell, Microsoft, Oracle, and Intel.47 In July2004, Computer Business Review listed Infosys and Tata Consulting Services (TCS) amongst the ten most influential companies in offshore outsourcing.48 In 2003, 20 Indian companies had found a place in The Forbes 2000 listof world’s biggest companies.49Estimated to be a US 90 billion industry, the Indian oil and gas sector isamong the largest contributors to the central and state exchequers in India,with its share of these revenues comprising approximately US 13.58 billion.The majority of the country’s 25 refineries, with a total capacity to process2.5 million barrels per day, are operated by state-run companies. India’sindian companies in the 21st century

state-owned oil firms also own stakes in oil and gas fields in Sudan, Iraq,Libya, Egypt, Qatar, Ivory Coast, Australia, Vietnam, Myanmar and Russia. 50 The Indian Oil and Natural Gas Corporation (ONGC) and its subsidiaries have established operations in the Caspian Sea and Persian Gulf regions,thereby establishing itself as a major player on the global stage.ONGC has been India’s ‘Biggest Wealth Creator’ between 1999 and 2005,according to a survey conducted for the Motilal Oswal Securities and Trading(MOST) Awards in 2005. ONGC is placed first amongst the Indian corporateslisted in the Forbes Global 2000 (ranked 265th) and the Financial Times Global 500 (ranked 326th). It is ranked 454th in the Fortune 500 list. The corporation’s 10 percent equity sale, the la

21ST CEnTURY MOHaMMEd Saqib, THE Rajiv GandHi FOUndaTiOn RajESH SEHGal and dEnniS PaMlin, WWF. indian companies in the 21st century indian companies in the 21st century . business sector in sustainable development and innovative solutions that can be applied to achieve t

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