This article coincides with the successful state visits of the Indian Prime Minister, Narendra Modi to France, Germany and Canada as well as the fruitful visit of Kerala Chief Minister, Oommen Chandy to the UAE, which included a high level meeting with His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and the Ruler of Dubai. The ultimate aim of both the leaders were the same: Bring investments to India.
As I am trying to do a reality check on the ground realities related to Foreign Direct Investments in India, I would like to emphasize on the investment opportunities, trends and challenges for the potential investor. People may have divided opinion on the style of functioning of the Prime Minister, but I am sure everyone will agree with me that he has brought a positive change in the perception of investors. Any investor would like to have a strong leader, who stands for reforms, who talks straight and means business, who is hands on and demands results. Let the politicians discuss about the other side of it, but for the business community he is a leader who has a vision and plan for tomorrow.
The “Make in India” initiative of the Indian Government has been well received by investors. The Kerala Government has given the nod to go ahead to build the metro coaches at the Sri City manufacturing unit of the French Giant Alstom, rather than importing them from France. Responding to Modi’s Make in India initiative, Airbus says it is prepared to manufacture aircraft in India, and has plans to raise component outsourcing to $2 billion over the next five years from $400 million at present.
No one has doubts about India’s significant manufacturing expertise. The entry into Mars orbit of the ‘Made in India – Managed by India’ Mangalyaan satellite trumpeted to the world the country’s skills in high technology. Yet India’s manufacturing industry is significantly small, both as a proportion of the economy and in terms of its share of global exports. It requires robust and drastic action to modernize archaic employment laws, simplify taxes, redraft dysfunctional trade agreements and fix the country’s chaotic and inferior infrastructure.
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But the positives weigh more. Exports as a percentage of Gross Domestic Product have more than doubled – from 6.9% to 17%, since 1992, when Dr. Manmohan Singh, the then Finance Minister and later Prime Minister, introduced a pioneering budget that opened the Indian economy to the world. India exported more than $313 billion in goods in the fiscal year to March 2014 compared to $18 billion in 1992.
The surge in exports reflects a broad diversification in both product range and destination markets, which has accelerated in the past decade, moving away from the traditional trends. The share of traditional exports such as textiles, ready-made garments, leather products and agricultural commodities has fallen significantly over the past two decades. Petroleum products and engineering goods such as machinery and parts, transport equipment and electronic goods now account for more than 40% of exports.
If we look at the sector wise contribution to GDP, India is doing pretty well in services sector (includes IT, tourism, retail, banking, finance) which contributes 53% to GDP and employs 27% of the work force. Manufacturing or Industry (petroleum, pharmaceuticals, gems, jewelry, textile, mining, engineering industry) contributes 27% and employs 22% of total workforce. Agriculture contributes 14% but employs 51% of the total workforce. or so and will continue to do so; thanks to the advantage we have in the Information Technology sector. Agriculture sector needs to be mechanized in such a way that the productivity goes up exponentially ensuring food security to the billion plus population.This high per-person productivity will help the surplus manpower to move from agriculture to the manufacturing and service sectors.
Long-term growth drivers for India
• Demographic dividend
Currently half of India’s 1.2-billion population is under the age of 25. By 2020, India will have the world’s youngest population, with a median age of 29 years, compared with a median age of 37 in China. This demographic dividend could potentially give India the biggest labor force and make it the largest consumer market in the world.
• Growing middle class
India’s educated, tech-savvy and relatively affluent middle class of 250 million already represents one of the biggest consumer markets in the world.
• Low penetration of goods and services
Despite the economy’s progress over the past quarter-century, the Indian market still has a relatively low penetration of goods and services, which translates into massive untapped potential. For example, in 2009, there were only 11 passenger cars per 1,000 people in India, compared with 34 in China, 179 in Brazil, 233 in Russia, and 440 in the U.S.
• India is a mature democracy with well established institutions
India has a thriving business sector with dynamic SMEs and large companies that are increasingly expanding overseas, educational institutions that are among the world’s best, and competent financial organizations. RBI plays a responsible role in regulating the banks and the Indian stock market is one of the most mature and vibrant financial market. The daily turnover in the Equity Cash segment of National Stock Exchange (NSE) is around $3 billion and that of Bombay Stock Exchange (BSE) is half a billion dollars.
• Reforms Matter
In India, these include foreign direct investment, the Land Acquisition Bill, the coal and power sector, direct transfer subsidies and streamlined tax regimes. The government will have to take bold steps like allowing foreign investments into the key sectors and even divesting the PSUs, even the profit making ones.
• China-style GDP Growth
India is expected to have the fastest GDP growth rate in emerging markets and will beat China by 2016 if it grows over 7.5% next year. The government is counting on 8%. But you also have to note that India began its economic reforms in 1991 where as China began in 1980. China is today a $10.4- trillion economy and India is just a $2-trillion economy.China successfully built ultra modern cities and the rural areas were transformed to major business hubs. Similarly, the Indian Government has announced the plan to build 100 smart cities across the country.
• India Vs China
Under pressure from USA, China had to appreciate its currency which is eroding its export competitiveness. Currently the wages in India’s organized manufacturing sector is $1.50 an hour unlike China’s which stands at $3 an hour which implies India has a competitive advantage in terms of labour costs. Sustained effort over the next 10 years can definitely make India a manufacturing hub.
The Challenges
Improve the ease of doing business. Present Government has kept the goal of attaining 50th rank from the present rank of 134 in the next two years. Time taken in registration of business from existing 27 days be reduced to only one day as in Canada and New Zealand is one of the targets. Decision making has to be rule based and not left to the discretion of the individual which is Crony capitalism.
Provide clarity on taxation issues, merger & acquisition process. The recent examples of Nokia shutting its plant in Chennai because of tax issue and the Vodafone retrospective tax issue definitely had a negative impact on International investors exploring investment opportunities in India and was keeping potential major players away from India. I appreciate the Finance Minister Mr. Arun Jaitley for bringing some clarity to the issue, which might allay the fears of foreign investors.
Focus on quality education and not just improving skills. Skills are transient and might become redundant with changes in technologies. Quality education will ensure that people will continuously learn new skills to meet the changing requirements of an economy. Labour reforms are the need of the hour. Incentivize good performance rather than making it tenure based. We have numerous examples of PSU in India who are struggling to stay afloat because of inflexible labour laws. BSNL is a prime example of this. Labour reform is about adopting practices linked with growth of the contributing employee along with the growth of the organization.
Increasing FDI by opening up various sectors on need basis. Present government having a majority of its own must conduct the economic reforms at a good pace. The initial signs are encouraging but can it be sustained is the big question which only time will answer.
India offers a great opportunity for investments. And the world is looking towards India. India is undoubtedly emerging as the leading Global Economic Power and an Emerging Market.
This article was originally published in Kreston Menon April-June Newsletter.
