One of the most recent, comprehensive evaluations of current business conditions in India is the World Bank Group’s Doing Business 2007 database (www.doingbusiness.org), which provides reasonably objective measures of business regulations and their enforcement in 175 countries around the world. These indicators collectively look at and relatively quantify five macroeconomic criteria considered important in assessing the feasibility of succeeding in a country:



•            The degree of regulation in the economy

•            The quantifiable effect of regulations on business activities

•            The extent of legal protection the business can expect

•            The flexibility of employment regulations

•            The tax burden on businesses

It’s very important to emphasize that these indicators look at the effect of regulations on a country’s competitiveness, not perceptions or opinions from the business community at large. The World Bank Group’s rationale for taking this approach centers on its mandate to promote growth and expand opportunities for the poor (in other words, to effect sustainable development).

So, how does India measure up?

The good news is that India has improved its overall position by four places since the last ranking was published. In this survey, India ranks ahead of 63 percent of the 175 countries studied in getting credit (in front of China, Brazil and Russia); ahead of 81 percent of these countries in protecting investors (again, ahead of China, Brazil, and Russia); ahead of half of these countries for starting a business (well ahead of China and Brazil but behind Russia).

Specific global changes in indicator rankings for India since the previous survey are as follows:



•            Getting credit improved from 62 to 36

•            Starting a business fell to 111 from 93

•            Employing workers and paying taxes fell slightly to 85 from 83

•            Protecting investors fell slightly to 33 from 32

•            Dealing with licenses, registering property, and closing a business fell slightly to 134 from 133



In general, this study suggests that India, while still having much room for improvement, is reaping the fruits of earlier efforts to improve the business climate as well as laying the foundation for overall improvements in the years to come.

Macro factors

India’s diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services (services are the major source of economic growth, accounting for half of India’s output). To ensure political stability, the Central Government is working hard to develop and implement economic-reform programs that include developing basic infrastructure to improve the lives of the rural poor and boost economic performance. Government controls on foreign trade and investment have been reduced in some areas, but high tariffs and limits on foreign direct investment are still in place.

The sale of government owned industries to private investors essentially came to a halt in 2005. This privatization policy continues to cause political debate. The continued social, political, and economic stiffness in the country is affecting population-wide free-market initiatives.

India is seriously trying to significantly expand its manufacturing sector and sees this effort as the lynchpin in its efforts to create jobs for millions of people and to drive exports that will bring in much-needed cash.

Despite India’s strong growth, however, the World Bank and other multilateral agencies worry about the combined state and federal budget deficits, which run at approximately 9 percent of GDP. One of the persistent problems is that government borrowing has kept domestic interest rates relatively high. The World Bank feels that economic deregulation would help attract additional foreign capital and reduce interest rates. However, India’s huge and growing population is the fundamental social, economic, and environmental drag.

Most of the recent spectacular economic growth in India is visible in just a few metropolitan areas: Greater Mumbai, in the state of Maharashtra; Bangalore, in the state of Karnataka; Delhi, in the National Capitol Region; and Chennai, in the state of Tamil Nadu. Even within these states and territories, the distribution of wealth is astounding. Great Britain’s final abandonment of Calcutta for New Delhi in the early 1900s stunned India’s northwest coast, which has not yet seen its fair share of India’s economic miracle. Mentioning Kolkata still conjures up images of Mother Teresa caring for the desperately poor in its squalid slums.

Evidence from historical and recent data suggests that the economies of all states and territories in India are growing and that poverty is on the wane. It also suggests that the relative economic rank of states and territories has been quite constant, the distribution of wealth is increasingly polarized, and economic well-being is not related to a state’s or territory’s population density. Some of the richest states and territories are Delhi, Punjab, Maharashtra, Haryana, Kerala, Gujarat, and Tamil Nadu. Nationwide, states with high growth rates grew over twice as fast as those with slow growth rates. The per-capita income of the richest state (Punjab) is presently 4.5 times that of the poorest state (Bihar).

India’s coastal states and territories, which are generally its richest, have long enjoyed the economic benefits of trade, manufacturing, and services concentrated there. It’s no surprise that the handful of states with the highest per-capita incomes and with barely 25 percent of the population account for nearly 45 percent of the country’s economic activity. States and territories with a viable and diverse middle class are better off, and capital flows easily in their direction. About half of India’s total foreign direct investment and over half of its commercial investment is concentrated in its five richest states.

A look at the demand for consumer goods shows that a true middle class is establishing itself in and around India’s hottest metropolitan areas. These people bring with them all the skills and education familiar to many Americans. Recent estimates put the size of this emerging middle class and the people dependent on it at up to 325 million, nearly 30 percent of the country’s entire population.

One might wonder if, in a country of over a billion people, employers could ever run out of workers. Evidence suggests it could. The continued growth in technology-based services, the addition of new skills and services, and industry’s hopes for a globally competitive manufacturing sector are beginning to uncover some of the limitations in India’s skilled and educated population.

The fact that half of the population is younger than twenty-five says a lot about available talent, too. Already, tech firms are scrambling to fill the domestic demand for qualified knowledge workers. Which business sector will be the next to feel the pinch, one that’s already well established or something new and exciting that’s still over the horizon?

 

Meeting the demand for skilled workers

There are several factors at play here and they must all be synchronized to ensure that India’s workers, present and future, can meet the demands of its growing economy and support its role in the global marketplace. For much of the country’s history, education in India was a privilege. Constrained by age-old prejudices and discriminations, the majority of India’s children only had access to educational opportunities commensurate with their anticipated future role in society. Thus, on one end of the spectrum, few if any farmers received more than a rudimentary schooling in arithmetic and grammar, while on the other end most Brahmins lived a life bathed in the highest education the country could offer.

Many upper-caste members earned advanced degrees while studying overseas in Europe, the United Kingdom, and the United States. For most of the twentieth century, and especially since Independence, there has been a steady brain drain as educated, intelligent Indians looked to foreign lands for the opportunities and rewards they could not find at home.

Few of these emigrants have ever moved back and neither state governments nor the Central Government have made repatriation a priority, largely due to India’s pressing overpopulation problem.

Beginning in the 1980s, the intrinsic value of the Indian people as a national resource in the country’s growth and its future success became increasingly important to the Central Government. In 1985, the Ministry of Human Resource Development was created from a collection of mostly inefficient agencies and given the mission of integrating and standardizing state and central educational agencies and resources. Its goal is to provide education and training for all Indians from childhood through the rest of life.

Infrastructure

India’s national infrastructure is continuously undergoing tremendous change. Money is pouring into capital projects from the government as well as private sources. Investment portfolios have been accumulating more and more infrastructure instruments as firms in the sector book orders at a record pace.

Yet, India’s antiquated infrastructure still hangs like a millstone around its neck. Commuters can sit for hours in traffic getting to and from the office. In Bangalore, Western firms have threatened to or have even pulled out of projects and joint ventures due to their perception that it’s literally impossible to get around with any kind of efficiency.

India is working hard to overcome this liability, but hundreds of years of malaise cannot be jumpstart overnight.

Elephants and camels are still used for transportation, although not in newer urban areas. Roads, railroads, shipping ports, and airports continue to expand. Besides the Central Government, the private sector is getting involved in developing for-profit road systems.

One of India’s greatest civil engineering and construction projects has been the Golden Quadrilateral. Part of the ongoing National Highways Development Project to build four and six-lane expressways connecting important areas of the country, the 3,500-mile long Golden Quadrilateral is India’s national ring road. It connects major metropolitan areas in Delhi, Bangalore, Mumbai, Chennai, and Kolkata and serves as the jumping-off point to other major highways to the north, northeast, east, south, and central areas of the country.

India is either famous or infamous for its railroads, depending on where or when you’ve last ridden on them. Since the early 1990s, the government has significantly modernized parts of the railway system, but dwindling financial support and protectionist policies of equipment manufacturers regularly takes a toll.

All zonal railroad systems are owned by the government and operated by Indian Railways. The fourth most heavily used rail system in the world, Indian Railways operates nearly 15,000 trains a day. It carries over 1 million metric tons of freight and 14 million passengers on 8,700 trains between 6,856 stations and countless depots.

In recent years, annual loads have exceeded 500 million freight-tons and more than 5 billion passengers.

Ports and terminals

India has up to eleven major seaports, depending on the criteria. These are overseen by boards appointed by India’s Ministry of State for Surface Transport, but they are managed by semi-independent port trusts, including the navy, port labor and port industry, and ship owners and shipping companies.

These ports are Kandla, Mumbai, Nhava Sheva (Jawaharlal Nehru Port Trust), Marmagao/Panaji, New Mangalore, and Kochi (Cochin) on the west coast; on the east coast are Kolkata (Calcutta-Haldia), Paradip, Vishakhapatnam, Chennai, and Tuticorin. A twelfth, Ennore Port, was originally conceived as a coal-handling facility to supply electricity generation throughout Tamil Nadu-its motto is “Energy Port of the New Millennium”-and Ennore India’s first port being run as a corporate venture.

Total port traffic nationwide is estimated at nearly 500 million tons, with the major ports accounting for around three-quarters of the traffic.

Telecommunications

In telecommunications, India is seeing the greatest change in any of its business sectors. Deregulation and liberalization of telecommunications laws and policies have sprouted hundreds of private service providers as well as greater public use of a variety of existing services. For example, recent estimates put the number of Internet users at around 50 million and the number of Internet hosts at near 2,000,000.
 

Satellite and radio

India has one of the world’s largest domestic satellite systems and is the largest in the Asia-Pacific region. The Indian National Satellite system (INSAT) has nine satellites carrying about 150 transponders, which supports telecommunications, broadcasting, weather and emergency-response needs.

Financial stability

Indian fiscal and monetary thinking has come a long way since the persistent budget deficits of the 1980s and the foreign exchange crisis in 1991, when the country came to the brink of bankruptcy.

Staring into the abyss, the Central Government took several major steps that turned things around. It worked hard to bring domestic spending into line with tax and other revenues, loosened restrictions and artificial valuations of the rupee, and began the crucial undertaking of opening the country’s economy for foreign investment while placating as much of traditional business as possible. The most successful product of these policies has been India’s high-tech industry, which has made millionaires out of more than a few people and laid the foundation for a small but new middle class whose lifestyles are certain to spread their wealth to other socioeconomic strata.

The banking sector also has been reinventing itself in support of this growth and is continuing to lay the foundation for the future. Embracing its responsibility to all the people of India as monitor of the country’s financial stability, the Reserve Bank of India regularly announces new reforms, initiatives, and policies that it believes will make India much more attractive to foreign investors. The bank has focused its efforts on controlling inflation and stabilizing financial institutions, financial markets, and the financial infrastructure.

While tech services have led the country’s emergence onto the world’s stage, India’s economic and social future is tied to its own domestic economy. As noted above, the incredible pay increases enjoyed by a small part of the population rarely trickle down very far. How well or how poorly India plays this hand could mean the difference between life and death for millions of its citizens. wt

Sidebar: Exports to the U.S. Transition From Low-Cost Commodities to Value-Added Products. By Reena Mital

From a low-cost supplier of mainly commodity goods to the U.S. market, Indian companies are today moving a step ahead in the race to maintain their shares in their single largest market.

Setting up offices in the U.S., inking joint ventures with U.S. counterparts, mergers with and acquisitions of U.S. companies, are the latest strategies being followed by Indian companies across industry sectors, in a bid to better service the American market. There are around 45-50 such Indian companies in the U.S. today, and the number is growing fast.

The U.S. market accounts for almost 15 percent of India’s total exports (even as India accounts for not more than 4 percent of total U.S. imports).

Ever-increasing price competition from China, especially in the commodity segments, has meant a preference for Chinese goods over Indian goods. The weakening dollar and appreciating rupee have also impacted growth of India’s exports to the U.S. These factors have forced Indian companies to implement newer strategies in the U.S. market, focusing on value-added products and services.

A shift up the value chain

The option of setting up base in the U.S. market is, however, limited to some of the larger companies. Indian industry, largely dominated by small and medium enterprises, has to continue with exporting goods as it faces global trade challenges. Even in this segment, though, there is a distinct shift from low cost product exports to value-added exports.

Take India’s main export category-textiles and clothing, accounting for 25 percent of its exports to the U.S. While readymade garments (in the range of $4-$6) account for around 60 percent of textile and clothing exports, this share and volume has remained fairly stable as growth shifts to China, which is becoming the dominant supplier.

In contrast, exports of coated fabrics ($10-$15 a square meter) have shown immense growth, recording a 50 percent growth last year over the previous one. Knitted fabrics have witnessed triple digit growth. India’s entry into this market has been of recent origin. Requiring sophisticated production and processing technologies, import into the U.S. of such products was largely confided to Japan and Europe.

Gems and jewelry

Another traditional export item, accounting for a further 25 percent of India’s exports to the U.S., is gems and jewelry. India’s gems and jewelry exporters had, for five years until July 2007, enjoyed GSP (Generalized System of Preferences, a trade program to promote economic growth in the developing world) benefits in the U.S. market, enabling them to become important suppliers, especially of low cost, smaller diamonds. Those benefits have now been withdrawn.

To help its industry remain competitive (China and Hong Kong being the main rivals), the Indian government has brought down to zero the import duty on polished diamonds, helping exporters to source its input at international rates. Correspondingly the export of diamonds as more than doubled.

The industry is now moving up the value chain, as exporters increasingly moving into exports of diamond studded and designer jewelry. Almost all leading exporters have invested heavily in technology and design to compete in this international market.

Engineering goods

Engineering goods make up another 25 percent of the Indian exports to the U.S. market, registering an export growth of almost 40 percent last year. In keeping with the growth in India’s iron and steel capacities and mining activities, exports of this item account for a share of around 40 percent in metal exports. Exports of capital goods accounted for another 40 percent of the total engineering goods exports, to the U.S.

Almost every engineering company-Steel Authority of India Ltd, Bharat Electricals, Tata Steel, Jindal Steel, Larsen & Toubro, Patel Engineering, and many more-are witnessing phenomenal growth, driven by the developments in India’s power and infrastructure sectors. All these companies have recorded increases in orders, and are focusing on the export business too.

IT and IT-enabled services continue to be a forte within the Indian industry, with major multinationals setting up base and R&D centers in the country. Trade with the U.S. accounts for some $32 billion, with India’s huge pool of low-cost IT talent  expected to grow.

Pharmaceuticals and healthcare

While the above can be considered India’s traditional export strengths, there are other segments which are emerging, again with the U.S. as the main market.

India’s exports of pharmaceuticals to the U.S. have recorded a growth of 95.65 percent during last year, to approach $550 million last year. This success in pharma exports to western countries has occurred over a short span of a half-dozen years.

India has a number of advantages in this sector. The raw materials and inputs are domestically available, plant and machinery is available locally, companies are spending increasingly on R&D, and the government is considering the setting up of as many as 10 pharma parks, which will provide complete infrastructure support to production, R&D and export.

Indian pharma majors are among the leading companies setting up marketing offices in the U.S., entering into joint ventures with American companies and also taking over U.S. companies to build efficient logistics and marketing networks in this lucrative market. 

Additionally, many U.S. pharmaceutical companies are setting up R&D centers in India, due to low costs of operation, and a large population that allows quicker data collection.

Processed foods is another export sector of recent origin. While the value is still small ($50 million in 2006-2007), the growth trajectory is steep. Earlier marked by small and medium enterprises, the sector has now attracted large corporates and multinationals, targeting the domestic and export markets.

Logistics attract investments

The Indian logistics industry has been facing rising costs, at a time when China is moving into just about every market and segment. Transaction costs (domestic duties, cost of utilities, freight, customs charges, etc) amount to 14-16 percent of the production costs. Wages are low, but so is productivity. Labor reforms remain to be implemented.

Port facilities continue to be inadequate, even as exports and imports rise manifold each year, leading to unaffordable delays and rising costs. Road transportation is the only cost-effective option available to small and medium enterprises, even as road infrastructure is poor.

Special economic zones and industrial parks are being looked upon as the solution to lower costs, but these are taking long to come up. Realizing that the Indian market is hugely underserved, a number of international logistics companies are setting up base in the country, often partnering with local companies to develop rail and highway.

International logistics majors-DHL, FedEx, and others-are collaborating with smaller Indian service providers to service every region of the country. In 2006, C.H. Robinson Worldwide Inc. joined hands with India’s Triune Logistics Private Ltd, to provide a wider range of services to the Indian market.

In conclusion, while it is clear that India cannot meet Chinese prices, it remains among the top trading partners for the U.S.

Sidebar: An Exploding Middle Class Economy Growing Through Internal Dynamism. By Neil Shister

Carmine D’Alosio came to India 18 months ago, after three years in Korea. As a Minister Counselor, Commercial Affairs in the Commercial Services, the international trade promotion division of the Department of Commerce (http://trade.gov/cs/), he’s well positioned to see striking contrasts between the two countries.

“Korea,” he observes, “is for all intents and purposes a developed, mature, export-oriented economy. India is a booming market with an exploding middle class that relies on internal dynamism for its growth.”

Speaking to me early one morning from his office in New Delhi, D’Alosio said the big question for U.S. businesses contemplating entry into India is whether “you can realize this general potential in your particular sector given the state of the operating environment and the state of the market development?” Typically, his answer is “an affirmative ‘yes,’” although he concedes the devil is in the details.

Even in light of current cyclical trepidations (India’s benchmark stock indices lost some 15 percent in the first quarter of 2008, several major IPOs were under-subscribed), D’Alosio points to major direct foreign investments going forward in heavy manufacturing, energy, iron and steel as indicative of the long-term bets being made on the economy (which has been growing the past few years at an annual rate upwards of 9 percent).

The age-old complaint about the bureaucracy’s hostility to business no longer rings true. “The environment here is pretty good,” he says. “There remain some obstacles and challenges but things have changed dramatically. Tariffs are going down, there are fewer sectors or products that require special permission or permits to import. In most areas you don’t have to wait for the government to provide official approval to operate, which means that there’s less corruption when the government doesn’t have discretionary power over your business.”

The biggest problem facing Americans coming into India is finding the right partner. “A lot of work has to go into figuring out your partner’s capabilities and compatibilities. It’s a big country that can be overwhelming. That’s where we come in, to help people sift through a lot of the partners.”

He underscores that India is an extremely price sensitive market and that, when U.S. companies seek out a distributor, “often the knee-jerk reaction from them is that ‘your product won’t sell here, it’s too expensive, that’s not the way we do it here.’ You’re going to hear that generic response.” Take it seriously, he advises, but don’t consider it fatal. “People have to really do their homework to see where they have specific opportunities to sell.”

“The prevailing view is that Indians don’t need nor want the Cadillac of the industry so you can’t be too expensive. But on the other hand, there are examples of the market wanting U.S. companies.” He cites one: a company exporting poultry to Japan chose U.S. built equipment despite being more costly European competitors because tough Japanese customers demand quality.

Meanwhile, he points out that the power sector, particularly sustainable energy, presents a vast opportunity. “India is the only country in the world with a ministry of New and Renewable Energy. Wind has taken off. They’re very interested in U.S. solar power, and waste-to-energy.”