An Indian summer

Posted on 11 Jan 2008 by The Manufacturer

The Indian economy is growing almost as fast as China’s and the country is set to become a commercial giant during the 21st century. Ruari McCallion looks at India as a place to do business, and discovers a land of growing opportunity and fading bureaucracy

Robert Berkeley, managing director of publishing outsource company KCS Express, likes doing business in India. In fact, he prefers it to China.

“Beijing feels like a western airport. It’s quiet and free-flowing: your progress is smooth,” he said. “Land at Delhi and you emerge into chaos. India has a vibrant business culture; people leap into any gaps they spot and start selling.”

The chaos is the thing that hits the first-time visitor to India. The smells, the crowds, the noise and the colours leave you in no doubt that you’re in a different country and a different culture. It takes a while to adjust and start taking it all in; when you do, you begin to uncover a country that is different, dramatically so, but has similarities, too.

“British business would recognise the Indian legal system as similar,” said Francesca Lee, of Cresco Legal. “The judicial system is pretty much on the ball. In a recent tax case against Morgan Stanley, the Supreme Court came out in favour of them on one point and against in another, which was logical and a good judgement, to me as a lawyer.” That hasn’t, so far, happened in other emerging economies, like Russia and Turkey. “Indian law is based on English law. It has a solid foundation, it’s clear which direction it’s going and so I find it more comfortable to work in India than China.”

India is a democracy – it’s the world’s largest and it’s proud of that fact. Democracies can be inconvenient; taking the view of millions or, in India’s case, billions of people into account can be a real drag. It can be tempting to yearn for a strong central authority that tells people what to do and brooks no opposition. From time to time, you hear the phrase ‘benevolent dictatorship’ mentioned. A dictatorship is benevolent if it’s doing what you want it to; if it isn’t it doesn’t feel kind and considerate at all. The price of doing business in a teeming, chaotic democratic country is that it can take a while to sort out what’s happening; the benefit is that there are opportunities all over the place, and in areas the state isn’t necessarily interested in.

“The centralised state can’t govern effectively because it can’t know everything. The Soviet Union and other countries tried it and they failed,” said Berkeley. On the downside, the need for consensus, to give everyone a voice, can delay development. The Indian infrastructure does not stand up to comparison with its neighbour, China. If you have an office in the country, better make sure you have a large-capacity generator in the basement because power failures are far from unknown. Outside the main cities the roads are pretty woeful; but they are getting better, depending where you are.

India is made up of a number of states with a central government. I asked Ms Lee whether the country fell into the EU model, with independent countries making up a kind of confederation, or the US model. Neither, apparently.

“I think it resembles the model of Malaysia,” she said. “It has 13 states and each runs its internal affairs, but laws are completely centralised. They are passed by central government and then regional offices are informed. India is the same; each state has its own government, with laws enacted centrally. The only quirk is taxation; each state has its own sales tax.” And that is a situation newcomers should be aware of; internal logistics have to be established in the right place for the market. Land prices and skills may look attractive in, for example, a state bordering onto Uttar Pradesh, which has a huge population, but hold your horses before signing up. “If you carry goods from a warehouse in one state to sell in another, there is a tax to pay, so businesses are well advised to regionalise their warehouses so that they only sell in that state. We advise people to think carefully where they want to be and who they want to sell to. Get the logistics sorted out, so you don’t have to pay border sales tax.”

This is a weird situation for Europeans or Americans as we allow goods to pass national borders within our unions without hindrance or financial liability. It harks back centuries in the UK to the time of turnpikes on the high road – and it is changing; the move is for unified, centralised GST (goods and services tax) by 2010.

The UKIBC (UK India Business Council) advises businesses on working in India and promotes trade between the two nations. “Government authority is separated into two lists: Union list and State list,” a spokesperson said. “The Union list consists of 97 subjects on which the central parliament can make laws, and includes subjects of national importance like defence, foreign affairs, atomic energy, banking, postal services and energy. The State list contains 66 subjects of local or state importance; it includes police, local governments, trade, commerce and agriculture.” Even those are transferred to central government in times of emergency but the upshot is, if you deal with West Bengal, which is governed by the Indian communist party, or Uttar Pradesh, governed by Congress, you will be operating under the same legal, tax and technical framework.

India tried a centralised economy for decades after independence and the real stumbling block for inward investors was one simple fact: it wasn’t allowed. That began to be relaxed during Indira Gandhi’s last administration, in the 1980s, but it was a struggle that took a long time. The established Indian families wanted outsiders’ money but they didn’t want to surrender power and privilege. Swraj Paul, now Lord Paul of Marylebone, has detailed his struggle to acquire large holdings in two companies, Escorts and DCM, against the entrenched interest of the established families. Ultimately, he lost the battle but the tide of the war turned. The companies alienated the financial institutions and the legal system began to take more notice, to ensure laws were adhered to and all sides were treated fairly. Progress has taken a while but the pace of change is accelerating, as outmoded practices are swept away. The old days of the ‘licence raj’ – the need for a licence to even apply for pretty much everything – are virtually ended. As well as being inconvenient, the system was a golden opportunity for corruption. The cure was simply to abolish the need for licences, across a whole range of activities. Until recently, inward investors were unable to operate on their own across a whole swathe of sectors – they needed a joint venture (JV) partner. That has changed substantially, but some apparently odd examples remain.

“Only 51 per cent FDI (foreign direct investment) is allowed through the single brand route in retail, so JVs are the only way for companies to go unless it’s appropriate to go the 100 per cent manufacturing route,” said UKIBC. While most sectors are open to 100 per cent FDI, with the exception of areas deemed essential to national interest – defence, security, agriculture and telecoms, for example – the JV route still has some appeal, if handled carefully. It gives immediate access to the partner’s pre-established market and distribution channels, local management and knowledge. But caveat emptor applies: be sure your proposed partner shares your objective. There is no substitute for due diligence.

The opportunities to do business in, and with, India extend across all sectors – it isn’t just about saris and tea plantations. Tata is a giant steel and industrial corporation and it supplies steel to auto manufacturers from across the world. The country is forecast to be the world’s second-largest auto market within 30 years. Maruti and Tata Motors are the largest domestic players, with Japanese, Korean, European and American OEMs all present – so there are supply chain needs, too. The service sector is growing exponentially, fed by output of more graduates annually than the US and EU combined. One area where there may be an issue is, paradoxically, in IT – a sector where India has led. Nasscom, which represents India’s software companies, has estimated that there could be a shortfall of 500,000 IT professionals by 2010 and this impacts on pay; even a junior software-engineer can expect to take home $45,000 a year, so the country isn’t necessarily a low-cost source, even now, and it sure won’t be in the future.

The country’s opportunities for the future are built on solid foundations. Outsource companies thrive so long as they show they add value rather than being simply there for cost arbitrage, according to Mark Atkins of accountancy service company Compass BPO. Berkeley believes it’s about entrenched institutions, and fears of corruption, bureaucracy and ‘licence raj’ are fading. It’s an Indian summer – so come out to play.

India: facts
Population: 1.12 billion (2007)
Area: 1.26 million sq miles
Time zone: GMT + 05:30
Subdivisions: 28 states and 7 union territories
Languages: Official language – Hindi. Business and legal language – English. 22 other recognised
Religions: Hindus (81.3 per cent), Muslims (12 per cent), Christians (2.3 per cent), Sikhs (1.9 per cent)
Currency: Indian Rupee (INR)
GDP: India is the 12th largest economy in real terms (4th largest in PPP terms)
GDP per capita: $820
Growth: 9.4 per cent in 2006 to 2007
Exports in goods: $126.3 billion (2006 to 2007) up 22.45 per cent over last year
Foreign direct investment: $15.72 billion (2006 to 2007)
Imports in goods, including oil: $190.56 billion (2006 to 2007) up 27.75 per cent over last year
Natural resources: Coal, iron ore, manganese ore, mica, bauxite, petroleum, titanium ore, chromite, natural gas, magnesite, limestone, dolomite, barytes, kaolin, gypsum, apatite, phosphorite, steatite, flourite, etc.
Attractiveness: AT Kearney places India as the second most attractive FDI (foreign direct investment)
destination in the world in its latest survey

UK – India
trade and business

UK exports of goods to India were £2.69 billion

UK imports of goods from India were £3.34 billion

Chief UK exports to India are: non-metallic minerals (diamonds), gold, power generating and telecoms equipment, and industrial machinery

UK imports from India include: textiles, gems and jewellery, footwear, metal products, organic chemicals
UK has the third largest share of cumulative inward investment into India at $3.6 billion after Mauritius (OCB investments) and US

Major UK investors in India are Vodafone, Cairne Energy, Standard Chartered Bank, HSBC bank, British Gas, Unilever, GlaxoSmithKline

Major Indian investors in UK include Tata, HCL, Bharat Forge, Nicholas Piramal, Infosys, Wipro, Wockhardt, ICICI Bank, UB, Ranbaxy, Dabur