Inside Out: Business in India

By Anna Kitanaka

J@pan Inc’s column concerning business conditions in an emerging market

As the opposition to British rule in India mounted at the turn of the 20th century, the populace (second-largest in the world) began to push for self-rule and total independence. The outcome was a closely guarded society, eager to administer the deathblow to colonialism by cutting off inroads for foreign investment in the country. Nevertheless, following WWII, India pursued capitalist economic policies, flanked by some of the oldest financial institutions in Asia, such as the Bombay Stock Exchange, founded in 1875. Becoming one of the hotspots for foreign soul-seeking tourists during the hippy era, India remained firmly on the map as a cheap tourist destination.

However, with its low per-capita income (it has always had a large GDP due to the size of the population), the economy was struggling to survive and just a mere embryo compared to the economic development seen in countries such as Japan and South Korea. According to an article published by the Foreign Policy Research Institute on ‘The Rise of the Indian Economy,’ John Williamson of the Institute for International Economics in Washington D.C. Says that “There was even a steel industry and a relatively strong textile industry, but these were limited. It was predominantly a subsistence economy.” Further post-colonialism enclosure of the economy and the decision to uphold “collective action, not capitalist acquisitiveness” meant that the state’s grip on industry was tightened and licenses were required for expansion; most international exchanges were disallowed. 1991 marked the big change in governance, with India finally opening up its door and deregulation being the de rigueur buzzword for economic growth. Quantitative trading restrictions were removed, tariffs lowered and tax revenue, formerly garnered through trade, was equalized between other products. The financial services sector was reformed, and lending became freer.

Dusty Street in India

Out-done in outsourcing?
Compared to other quick-growing states where manufacturing plays a substantial yet highly competitive role, India found itself a niche market in the outsourcing sector, notably in the manufacturing and IT sectors.

Since deregulation in 1991, Fortune 500 companies flooded in for cheap IT outsourcing—the ’90s saw an approximate 40% growth per year in this sector. However, India is now faced with, what looks to be, a Catch 22 situation: as the economy grows, so do costs and the IT outsourcing market struggles to remain competitive. At the end of last year, there was a 12% appreciation of the rupee against the dollar, the highest since 1998, resulting in the industry performing awfully on the stock market with a 47% decrease on the MSCI India index.

Other markets are looking seemingly more attractive, and it has become impossible to talk about India without at least mentioning China in the same breath. Concerns that the Indian outsourcing market cannot compete against cheaper players such as China and Vietnam have worried investors about the future of one of India’s strongest industries. However, Sanjeev Sinha, President of the Indian Institute of Technology alumni Japan, disagrees: “India’s population is like a pyramid. There are a small amount of people at the top, the high-end, and a huge amount of people at the bottom. So as the top move upwards, the people at the bottom move a step-up too, but then there are people even lower down the pyramid who can always replace the first rank. India is sure to remain cost-effective.”

John Hawksworth, head of macroeconomics at PriceWaterhouseCoopers LLP in India, also believes India will continue to grow and is a safer bet than other emerging economies: “India rather than China, tops the growth league table, a reflection of India’s working-age population which is projected by the UN to continue to grow at a healthy rate unlike China, and the fact that there is greater scope for productivity and education levels to rise across the Indian population, enabling the country to catch up with OECD [Organization for Economic Co-operation and Development] countries in the long run.”

As well as IT, other outsourcing markets are springing up fast, with one of the newer more surprising additions including outsourcing for work on animation films. Most notably, major companies such as Walt Disney, Warner Brothers and MGM are already outsourcing low-end work to India.

Driving growth
Another area where China and India compete is in the cost-effective (in other words, very cheap) manufacturing, ownership and sales of passenger cars. Tata Motors, part of the super conglomerate of Tata Group, and China’s Chery, in partnership with Chrysler, are competing head-to-head to take advantage of the vast lowend market in Asia. In terms of domestic sales, China has the upper hand. Analysts estimate that India’s auto market will double to 3.3million car purchases by 2014, where as China will grow to 16.5million cars—a 140% growth over the same period. Sylvain Bilaine, the Managing Director for Renault operations in India, is all too aware of China’s infinite consumer market, however, with its growing economy, sees India as a stable place for the future of automobiles. He told us, “Amongst the growing markets, car ownership in China & Brazil is more than in India...but with the Indian economy continuing to show 7–9% growth, the Indian customers’ appetite for automobiles is showing huge growth. We believe that the Indian automotive market will grow at a CAGR (compound annual growth rate) of close to 18% over the next 5 years.”

And India has been quick to tap into this market. The world’s cheapest car—the Tata Nano—is a ten foot long, five foot high and wide no-frills car being sold for only US$2,500, and despite the lack of a passenger side-mirror, no air conditioning and just one windscreen wiper, it is expected, according to a UK newspaper, “to revolutionize transport across Asia.”

In contrast, China’s Chery motors and Chrysler’s deal to make the world’s cheapest car has been plagued with a “will-they-won’tthey” scenario, quality problems and the announcement that they may not be able to get it cheaper than US$5,000, nearly double the price of the Nano, whereas India keeps on growing, recently also entering the high-end market with Tata Motors’ acquisition of Jaguar LandRover from Ford in a US$2.3 billion deal.

The list of achievements and news of quick growth rates are endless—McKinsey & Company estimates that by 2025, India will rise from 12th place to 5th, overtaking Germany in terms of world consumer market size: “In short, we believe that India has now entered a virtuous long-term cycle in which rising incomes lead to increasing consumption, which, in turn, creates more business opportunities and employment, further fuelling GDP and income growth.”

Shaky structures
Although the future looks bright, as with all emerging markets, the infrastructure is not robust enough for a smooth ride to the top. Infrastructure is still well behind other developed nations, scaring off huge potential investment from companies such as Intel, who chose Vietnam over India for manufacturing microchips, a choice speculatively blamed on India lack of reliable power and water. The Indian government estimates that the country’s poor state of infrastructure is reducing the country’s sustainable rate of growth by 2% p.a, with supply chain risks being one of the biggest deterrents for foreign investors. However, the government is planning on upping its spending on infrastructure from 4.6% of the GDP to 8% in the next five years.

But is this enough? And even if it is, rapid systemic change can cause worrying social unrest. Kevin Liu, Asia analyst for Exclusive Analysis, thinks that as a result of infrastructure development, civil unrest could play a part in putting off investors: “In India, infrastructure projects can lead to opposition and unrest due to two factors: the displacement of people and triggering an escalation of prevailing local or state issues.” According to Liu, political groups in states like West Bengal and Bihar see infrastructure projects or policies as moves against the poor, and violent protests in March 2007, where at least 14 people died, is an example of the country’s struggle to catch up with the rest of the world. JI