India's road to glory strewn with
potholes By Kunal Kumar Kundu
BANGALORE - Indian business leaders are
much more optimistic about the future than their
international peers. They may have good reason for
optimism as a report by the global consultancy
firm KPMG suggests India is moving in the right
direction, though there are still hurdles to
overcome.
A recent global survey by
McKinsey consultants suggests executives in India
think that the opening up of the global economy
presents them with huge opportunities for growth.
The survey, which polled more than 9,300
executives around the world, including 537 in
India, indicated that about 88% of Indian
executives believe that continued economic
liberalization is vital to the future of global
business. Even more think the by-products of
liberalization - increasing affluence in emerging
economies and the proliferation of low-cost
manufacturing options - will be important global
business trends.
Indian executives see
their best growth prospects in the home market -
58% of them expect India to provide most of their
companies' sales growth during the next five
years.
That India is a bustling market and
an important growth center for the global economy
is well espoused by Thierry Cros, managing
director of Seco Tools India. According to him,
"Earlier, [India] was a reward posting for those
who were close to retirement." He added that
"These senior people would spend their time
playing golf and they would run the company as it
would have been run in Europe [read: expensively]
and the parent was not too concerned if the India
operations did not deliver any cost advantage.
Now, younger managers in their 30s and 40s are
coming out. For us, it's important we show
results. If we don't, there's a return ticket."
The big shift in the expat profile has
another implication: now, they tend to stay
longer. "The senior people stayed three years at
the most," Cros said. "Now, MNCs [multinational
corporations] want in-depth understanding of the
market and the culture. This is built up over a
longer period of time so we now have longer
tenures."
Prior to coming to India, Cros
had worked in his native France and in Germany,
and he recalls his first trip to India as a big
shock. "But lots has changed in the six years we
have been here," he said. "The gap between India
and Europe has narrowed and this is to be found in
the business environment too."
Not
surprisingly, according to a survey by global
consultancy firm KPMG, India has emerged as a key
foreign direct investment (FDI) destination as
foreign investors earn higher returns in India
than in other emerging markets.
According
to the report, India represents an economic
opportunity on a massive scale: China and India
are likely to be the world's two biggest economies
by mid-century, and although India has
underperformed in the first lap of the growth
race, there was a strong possibility that India
may well move ahead.
Although India is
still seen by industrial investors as an economy
where risk is higher and the business environment
more problematic than in rival Asian investment
locations, India also offers some advantages in
the region. The legal framework that protects
investment is one of the best in Asia. The economy
offers an abundance of technical and managerial
talent, often with international experience.
Geopolitical risk is diminishing
consistently, in contrast with some of India's
emerging economic rivals in Asia. And above all,
India has a demographic advantage that should see
its working-age population continue to grow well
into the century, increasing wealth and reducing
cost.
However, infrastructure bottlenecks
are hindering larger FDI inflow in India when
compared to countries such as China. "India may
need to make more rapid improvements in its
business infrastructure if it is to continue to
attract foreign investment in the face of growing
competition from China, which it outperforms in
many areas including return on investment," KPMG
said in its report entitled Manufacturing in
India.
Leaving aside infrastructure, KPMG
said India scores over other Asian nations in
terms of legal framework, availability of natural
resources, pool of technical and managerial
talents and the demographic advantage of a large
young population.
"The return on every
dollar spent in India has a better return than is
the case with other emerging markets that have a
more favorable environment," the report said.
While compiling the report, KPMG India managing
director Ian Gomes said, "It quickly became clear
just how many advantages India has over other
developing economies like China, Brazil and
Mexico."
According to the report, the
Indian central government has succeeded in opening
many sectors of the economy to foreign investment,
while reserving others to state or local business.
These continuing restrictions impose costs on
manufacturers even though many manufacturing
sectors (apart from strategic industries such as
defense and aerospace) are open for investment.
According to the World Bank, the burden of
licensing and bureaucratic administration has
significantly reduced since 2000. In terms of
companies' perception of the burden, India scores
better than either China or Brazil on business
regulation, better than either on the burden of
tax and customs administration and better than
Brazil on the perceived level of corruption
Indeed, India has changed, and changed
fast. "If you had asked me 15 years ago I would
have said there was no hope for India,
economically," said Kuldip Khushoo, head of
manufacturing at Honeywell Automation India.
"There were so many regulations and restrictions,
it was enough to send anyone crazy. But now there
has been a sea change, a real opening of the
economy."
Nevertheless, the road to glory
is still strewn with potholes which, if it remains
unattended, can make the journey painstakingly
slow. According to the KPMG survey, what holds
back the investors, more than anything else, it is
the quality of government and administration.
First, there are doubts about the
commitment of successive governments to deliver
rapid reform in what many agree is one of the most
regulated and bureaucratic of the emerging
economies. The reform process began under the
Congress party at the start of the 1980s, passed
into the hands of the nationalist Bharatiya Janata
Party (BJP) government in the 1990s, and then back
into today's Congress-dominated coalition
government after the general election of 2004.
Both Congress and the BJP proclaim the
cause of reform - actually dismantling India's
countless licenses, charges and administrative
barriers to business is another matter entirely.
And a significant part of India's labor cost
advantage is cancelled by the excessive
bureaucratic cost of doing business. After all,
India spent the first four decades of independence
trying to limit the influence of foreign capital
in the economy. Those attitudes die hard. When
Indian Finance Minister P Chidambaram presented
the budget this year, he still had to ask
parliament's indulgence for the fact the federal
government wanted to encourage foreign investment.
That apart, the most important constraint
continues to be the state of physical
infrastructure. According to the McKinsey survey,
60% of the respondents in India regard inadequate
infrastructure as a significant or very
significant constraint on growth, a view shared by
only 23% of the global panel.
Also, rather
surprisingly, for a country with one of the
world's largest labor pools, the Indian executives
see the high cost and low availability of talent
as the single greatest constraint on their
companies - a problem that worries them much more
than it does their counterparts around the world.
With a relatively young population of 1.1
billion people, India has a vast reserve of
workers, but the Indian respondents to the
McKinsey survey say that finding the right ones
will be difficult. Indeed, 81% of them (as
compared with 73% of the global panel) opined that
the cost and availability of talent will be a
significant constraint on business over the next
five years. Indian IT executives feel this kind of
pressure more keenly than do their counterparts in
other sectors: 91% of them say that it is a
significant constraint on the growth of their
companies. These views may reflect the rising cost
of IT, engineering and management employees in
hotbeds of growth such as Bangalore, Hyderabad and
Mumbai.
Corruption is also an important
cost, though not as debilitating. What concerns
investors more are inflexible labor laws that make
it difficult for the corporates to ramp up during
economic upswing, since they are afraid of being
stuck with excess labor when when the curve
slides.
However, while the task for the
Indian policy makers is onerous, respondents to
the KPMG survey agree that, whatever the faults in
execution, they are moving in the right direction.
Also, as awareness of India's potential
grows, so should the understanding of the business
case for manufacturing investment in India. Some
companies point out that actual returns from
Indian investment compare very favorably with
returns from emerging economies where the
environment may not appear quite so challenging.
"What has the invested dollar returned to
us in India, compared to say China?" asked
Pradipta Sen of Emerson India. "We have been in
India for 25 years and 17 years in China. Every
dollar we have put into India has earned a very
good return. Every dollar invested in China
promises a terrific return, but it is still only a
promise. Investing in India is justified in terms
of a solid historical business case."
Kunal Kumar Kundu is a senior
economic analyst with a leading foreign bank in
India.
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