India’s Unique Chance to Finally Stand Up

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Op/Ed Commentary: Chris Devonshire-Ellis

Dec. 31 – As we look back on 2009, the year in India ends with on an upbeat note. That is some relief after the tragedy of the Mumbai terror attacks at the end of last year, and a strong signal of the resilience of both the nation and its people. However, warnings over unresolved and long standing political issues remain.

India’s 2009 began with uncertainty, not just due to the global financial crisis, but also tensions over the nation’s national security in the wake of the apparent ease in which terrorists were able to penetrate many of Mumbai’s main focal points with nonchalance, arriving by sea near the Gateway to India, a central point in the city. India remained stoic in the face of such events just as the Indian economy remained relatively untouched by the events unfolding globally. Unlike China, with an exposure of about 40 percent of its total economy in providing global exports, India was less affected. Its domestic consumption ratio is more balanced, and a wealthy middle class – interestingly of about the same size of China’s at around 300 million people – continued to spend the country out of real danger.

India’s exports to the West account for about 20 percent of its total economy – half of China’s exposure – and although this caused pain for the export sector, the government stepped in to assist with a massive fiscal stimulus plan in any event. That has largely been snapped up by Indian consumers purchasing cheap cars, as the government tries to wean India’s rural population from ox and cart and into minivans. “Small is beautiful” in terms of auto sales came at just the right time for India, who’s Tata Nano looks set to become an iconic vehicle globally. With an emerging auto sector poised to offer rural India the chance of employment in a variety of related industries, the conversion from Ox to car is set to spearhead the rise of India as an economic power. The green movement, appalled at the prospect of 10 million Indians driving petrol fueled vehicles, is mildly consoled by India’s concerted effort to give them LPG engines, and unlike China, LPG gas filling stations are becoming a common sight on many garage forecourts.

A mandate to reform
The major event of the year was of course the general elections, which returned the first sitting prime minister in India in nearly 40 years. The Congress Party won a de facto majority, itself the first time in twenty years that India has a government not greatly impacted by having to horse trade with coalition partners. That stagnant political era, which has coincided with the rise of China during the same period, has now come to an end. India is equipped with a mandate from its people to move on, and with a business friendly and reform minded government in position, changes in India are coming thick and fast. To demonstrate the level of, and desire for change, India’s first tax reforms for 50 years are being pushed through Parliament in moves that will see an overall reduction in tax for many. Sectors previously off limits to foreign investors are being opened up. Indeed, my own firm obtained its full license to practice in May – just three months after the changes in law that made it possible. Our ability to bill for certain services had been restricted for the previous two years of our India operations. Opening up market sectors to foreign investors is an increasing trend as local market barriers are being torn down in the name of competition and free trade.

India has often been criticized for its lack of infrastructure, and indeed, much of India’s problems come from a lack of investment in many sectors, hampered by a lack of political will fermented by a two decade succession of political stagnation. While China has leapt ahead, India has lagged behind. China’s Shanghai Port can turn a cargo ship around in terms of unloading and loading it in little under eight hours, while to compare, in Mumbai it takes three days. India’s national highway infrastructure – the Golden Quadrilateral, and the NSEW Corridor – have yet to be built. Indian vehicles require special permits to travel interstate and are rarely seen outside their own backyard. However, the lack of infrastructure in India has now become the opportunity. As China now boasts high speed trains and maglevs, the world’s attention is turning to India to provide construction, goods and services to lift the national infrastructure onto a platform more in keeping with a 21st century country of 1.3 billion. As we wrote in the November issue of India Briefing “Investing in India’s Public-Private Partnerships” the Indian government will provide financial support to foreign investors who wish to get involved in the redevelopment of the nation. It may well turn out to be a bonanza of construction, building and development that may make China’s development over the past 20 years pale by comparison. Foreign investors involved in architecture, construction, and infrastructure development on all levels should be sending executives to India right now to assess the possibilities. While China is restructuring its economic base, India is poised to gratefully accept foreign direct investment into the national infrastructure development it so badly needs. Global GDP growth over the next two decades will be lead by the development of India, not China.

A domestic market the size of China’s
Coupled to that is the chance to participate in another major sales opportunity. India, like China, has a massive population, and a middle class of about the same size. More aligned to Western tastes than the Chinese, and culturally more accessible, the markets in India additionally represent a huge opportunity to sell. Not for nothing have brands like Bugatti, with a super car costing US$500,000, established show rooms in Mumbai. Busy too are the restaurants, bars and social meeting places. Mumbai at present is booming, with queues to get into popular restaurants. Shanghai seems quiet by comparison.

However, India still has an image problem in the West. “Dirty” is a common perception; and the food another. Part of this is related to Indian traditions, which are difficult to change. However, regardless of how sacred a sacred cow may be, it would be prudent to have them wandering about in controlled areas rather than freely along highways and main shopping areas. India needs to adapt some of its cultural habits to make life more appealing and marginally less chaotic in appearance. As foreign investors have become comfortable with China – a trip to Shanghai is appreciated – a trip to Mumbai may be met with a different reaction.

Additionally, just as China is diverse, so is India. India possesses a combination of 35 states and union territories, a number similar to China’s collection of 34 provinces, autonomous, special administrative regions and municipalities. Investors familiar with China will need to learn about India, and its diversity of culture. An adaptation to a rather different culture, coupled with an understanding of the significance of India’s multi faith population and diversity of near tribal ethnicity needs to be undertaken. While China has in many ways become deliberately bland to make it easier to attract FDI, India is far more demanding. Yet the rewards are there.

Infrastructure to drive growth for the next decade
Concerning the nation’s performance in 2009, the Indian government has been, like China, remarkably bullish about the growth of the economy the past twelve months. However, while a whiff of manipulation and lack of transparency surround China’s figures, a free and investigative media coupled with government accountability tend to keep India’s leaders more accurate, and even conservative in their statements. Accordingly, India’s growth of about 7 percent over the year looks reasonable and is probably correct. Talk of GDP growth of about 8 percent for 2010 appears again, reasonable and more importantly, sustainable. India’s growth is starting to be fueled by the redevelopment of its infrastructure and this should be a ten year trend, possibly longer.

Additionally, the Indian Rupee, unlike the Chinese RMB, is a globally traded, fully convertible currency. There are no political or financial concerns about the manipulation of pegs to the US dollar or any other currencies. With less dependence on exports to the US, India can afford to decouple from other major economies in a manner that China cannot. Additionally, the current Indian government is led by a respected economist – Prime Minister Manmohan Singh is a first class honors economics graduate of Oxford University, has previously spent five years as the country’s Minister of Finance and is a renowned expert on global economics. The rest of the Indian government’s senior leaders are also a combination of economists and lawyers, which makes sense: the economists to balance and push forward the national growth, balance payments and reinvest, and the lawyers to push through constitutional reform. It is telling that China’s boom the past twenty years has been fronted by Chinese leaders well versed in engineering, and that this continues to this day. China’s current economic woes and inability to decouple from their exposure to U.S. exports need the wisdom of a Manmohan Singh, whose 1964 book “India’s Export Trends and Prospects for Self-Sustained Growth” was an early critique of India’s trade policy. India accordingly is unlikely to get into the sort of problems China is currently facing.

Manufacturing out of balance with technology
However, there are problems in India’s manufacturing capabilities. Whereas China has admirably invested in the education of its semi-skilled and skilled workforce, India has lagged behind. While Indian labor is cheap, investors will need to spend time on training just as was the case in China fifteen years ago. This gap between the competencies of Indian and Chinese workers will be closed over time, but for the present, an economic comparison needs to be put into place to measure up the benefits of employing Chinese workers on higher salaries and greater welfare and job protection than against training an Indian workforce whose wages are lower yet require training. It is an equation that will become increasingly pertinent as companies look to relocate manufacturing from China to India or elsewhere in Southeast Asia.

However, unlike China, India has made significant inroads into its technology and services sector, which now accounts for about 55 percent of its GDP. While India needs to reduce this ratio to develop manufacturing to cater for the massive infrastructure investments and developments the country has begun to embark on, the nation does appear to have developed an IT industry base suited to the demands of the 21st century. IT rules in India, and the best and brightest have strong collaborations with R&D institutes in the United States and beyond. Fluency in English is a major driver. It is a far different economic model than China’s which has been created from the development of low end manufacturing, and is struggling now to progress beyond that on a national scale. India is already there in added value service, and the reliance of India on an economic base strongly rooted in IT is a development yet to come to fruition.

Relations with China
In other areas though, India and China share common interests, most notably over climate change issues, where in Copenhagen both stood firmly together, and also on security, where a common fight against potential Islamic extremism is of concern to both. A sticking point is India’s position over the Dalai Lama, and the hosting of the Tibetan government in exile by India, which China regards as subversive. Concerns over the death of the Dalai Lama – he is 74 and rumored to be ill – are more likely to impact on China than India. However, a reincarnated Dalai Lama discovered in Indian territory could create serious diplomatic pressures between the two countries. India also still possesses fault lines in its union. The recent debacle over the creation of a new state of Telangana could surely have been avoided, and did not seem to be in the best interests of the Indian Union as a whole. India will need to manage its historic border fault lines well if this is not to impact on much needed development.

Looking forward for India in 2010, I expect the economy to rebound and to move quickly to a sustainable 8 percent to 9 percent per annum GDP growth. In this regard, India will almost certainly reveal faster growth than China can over the next few years. Its economy will be driven by infrastructure development, just as China’s has been. Exports too are likely to rise and reach somewhere in the region of US$200billion – relatively small beer compared to China overall, but coming from a much lower base. The nation is entering a period of growth, dynamism and prosperity unmatched since independence, and if India can avoid conflict with Pakistan and damaging terrorist attacks from fanatics, the future looks bright indeed. While the nation is very different to China, it is in many ways embarking on a similar journey. India’s success will be in managing its economy – which it seems well able to do, and pushing forward much needed reforms – which finally the political structure has provided. Investors globally should be evaluating India as a top priority for the provision of infrastructure expertise and goods, and this will drive the economy for much of the next decade along with an explosion of domestic Indian purchasing power.

Predictions

  • Actual 2010 GDP Growth: 8 percent to 9 percent
  • Internal security to be tightened on borders with Pakistan and China
  • Some tensions to remain with China due to Dalai Lama issues, but bilateral trade to increase
  • Foreign investment opportunities: At present, massive demand for investment in infrastructure related projects, in addition to an expanding domestic consumer market for foreign products at all levels; local purchasing considerations need to be implemented for second tier destinations
  • Foreign investors will need to look beyond perceptions of dirtiness and poverty

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and is responsible for the firm’s activities in India, where the practice maintains five offices and advises on foreign direct investment legal and tax structures into the country. He may be contacted at india@dezshira.com.