Looking for the new India: strong economic growth and an increasingly open business environment has pushed India to the forefront of many Western corporations' minds. But poor infrastructure, widescale poverty and bureaucracy could slow any further improvements - Indian IT to benefit from FTA - Cover Story

Business Asia, April, 2003 by Tamsyn Smith

For the uninitiated, the sensory invasion of walking down any Indian city street can be overwhelming. The country is simply too busy and too large to be ignored.

The same must now be said for the nation's economy, which in the past decade has had its nose to the grindstone in order to shed its downtrodden image and take its place on the world stage. A population of 1.03 billion (and one of the few countries to register annual growth of five per cent in the last five years), coupled with a business culture similar to the West thanks to a colonial heritage, means India at first glance presents an interesting proposition.

Companies from around the world are recognising this and are awakening to the notion that having a finger in the India pie is a wise business decision.

Elizabeth Sullivan, acting Austrade senior trade commissioner in New Delhi, says engagement with India in the short to long term is very significant for companies.

"Given that India has really only had 10 years of economic liberalisation, it gives a sense of what's to come," she said.

However, scratching the surface reveals that the country still has significant challenges to overcome. A large proportion of the population still live in poverty, and though the economy is growing, it is lumbered with a massive public-sector deficit, shaky infrastructure, an uncertain security situation and inhibiting bureaucracy. To succeed, India has a lot to overcome.

Image problem

India has built up a reputation as the best place in the world to employ cheap, highly skilled labour--a back office of the business world.

Robert Krakowiak, manager of export marketing and consulting for Australian Business Ltd (ABL), says the country has been targeted by many foreign companies looking for lower cost production facilities. Joint ventures, fully owned operations and out-sourced contract manufacturing were some of the more popular options.

According to the Economist Intelligence Unit (EIU), foreign direct investment (FDI) inflows into India grew by 65 per cent year-on-year to US$3.9 billion ($6.48 billion)in 2001/02. However, FDI accounts for only 0.9 per cent of India's GDP.

The EIU attributes this "under-performance" to poor image, coupled with restricting FBI policy, out-dated domestic policies, lack of foreign interest in disinvestment, weak regulation, and bureaucracy and red tape. It is not surprising, says the EIU, that only 220 of the Global Fortune 500 companies have any kind of presence in India.

Positive signs

However, there are signs that stalling government reforms to continue to open the nation to FDI may be due to gain momentum.

As an example, late last month the Government announced that it was considering allowing foreign investors to set up a new subsidiary in India without having to procure a no-objection certificate (NoC) from a partner if the old joint venture has ceased to operate. This is to be part of an impending package of measures to relax the rules for FDI, although it could take some time for bureaucracy to process the change.

Krakowiak says the Indian bureaucracy can have a very negative impact on business.

"They have learnt well from the British and, as we are often reminded, have refined it," he says, adding that slowly some of the more critical bureaucratic functions have been sped up.

Trouble

Not all can see the forward momentum.

An address by the union Minister for Disinvestment, IT and Telecom, Arun Shourie, at the recent India Today conclave, identifies the occurrence of "political paralysis" in the country. Shourie says the impediments to economic growth are all outside the economic domain, one of them being a logjam in the political arena.

"Fractured legislatures, the quality of persons in public life, half the political class forever out to denounce and obstruct whatever it is that the other half is doing ... governments should not wait for that will-of-the-wisp consensus, they should push changes in the conviction that 10 years from now there will be a consensus around the new constellation that would have been brought about by these steps," Shourie says.

"Use every opportunity to continue opening India up to the world--that will compel an improved work culture; plunged into water we will master swimming."

Although he is speaking from a political point of view with all the rhetoric that it requires, clearly the role of Government plays a significant part in the reason why India is not the shining economic star that it could be.

Government links

Sullivan says one of the issues foreign companies need to be aware of is the linkage between state and central Government, and the importance of these governing bodies to the business sector.

Meetings often need to be arranged with officials from both, in order to establish what role they are playing in any particular industry.

"The whole issue of privatisation is only really starting to be assessed," Sullivan says, adding that there is recognition of the need for differentiation between government and business, and the road to reform is set to be long and hard.