Making It In India
The Modi government is eager to lure in foreign investment, but behind the exotic grandeur of an Asian powerhouse is a reality of red tape and confusing tax laws.
India is a country where you can take your pick of the exotic, the genuine or the cliche. Just dip into the lush prose of Arundhati Roy or watch one of the Best Exotic Marigold Hotel movies. Early in Tahir Shah’s travel classic, Sorcerer’s Apprentice, he mentions an Indian astrologer’s conference in New Delhi, and how he has to push his way “past the bustle of crystal balls, dog-eared tarot cards and hand-reading charts,” while he waited for an auto rickshaw.
There are no snake charmers in this article. But there is a conjurer of sorts.
Back in September, India’s colourful prime minister, Narendra Modi—an occasional Gujarati poet who has more than six million Twitter followers—unveiled an ambitious “Make in India” campaign. Its core intention is nudging foreign businesses to invest in the country and helping turn it into a global manufacturing hub the way China is. The campaign has identified 25 key sectors, which sounds like a travel itinerary for how India could sweep across global business and industry: IT, healthcare, energy, automobiles… And to get foreigners on the grand tour, the Commerce Ministry has set up a special unit called Invest India to act as the first reference point for guiding companies on policy issues and regulatory clearances.
The timing is right. When much of the developed world is struggling to gain economic traction, India’s GDP has just clocked in at 7.5 percent under Modi. And the Reserve Bank of India has focused on one of the country’s most persistent weaknesses, the rupee, because of recent devaluations. The World Bank projects India’s economy to grow at 6.4 percent in 2015, calling it “a bright spot in an otherwise medium global economic outlook. An even more optimistic forecast by India’s Statistics Ministry expects 7.4 percent this year.
“For investors, India is emerging as an attractive destination thanks to rising GDP growth and falling inflation expectations,” says Kunal Kundu, an economist at Societe Generale Global Solution Centre in Bengaluru. “Worries about India’s current account deficit have eased, thanks to substantially lower crude prices.” Kundu says the country’s foreign exchange reserves are now at historically high levels.
India’s central bank governor, Raghuram Rajan, has been widely credited for his prudent monetary policy measures, which have helped bring confidence back to the Indian market.
And economists remain confident of India’s continued attractiveness. Some go so far as to forecast its real GDP growth will leapfrog past China’s by 2016.
“India will be the fastest-growing economy among the universe of emerging economies,” says Kundu. “Even on the inflation front, while the headline Consumer Price Index… might appear high, it will still be low by India’s standards and would continue to be within the central bank’s comfort zone, thanks partly to lower commodity prices.”
Much of India’s economic expansion has come on the back of its so-called “demographic dividend.” Those 35 and younger make up nearly two-thirds of India’s 1.2 billion population. A UN-Habitat report predicts that India will be the youngest country in the world by 2020, with a median age of 29 years, compared with a median age of 37 years in China. This large youth population could potentially make India the biggest consumer market and the biggest labour force in the world.
So Modi the Magician’s trick has worked—to a certain extent. Chinese telecom, Huawei Technologies, has sunk $170 million U.S. to open a research and development centre in Bengaluru.
Fiat Chrysler plans to manufacture premium SUVs in India and ship them off to Australia, South Africa and the UK. It’s the kind of strategy that Modi has already had in his playbook and has shown he can do well—he used it as the long-time chief minister in the state of Gujarat. He’s also pledged to improve India’s creaky infrastructure and invest in other developmental projects.
Good intentions are one thing, but India has always been notoriously slow, bureaucratic and full of dispiriting operational rigmarole when it comes to allowing foreigners to set up shop. Based on how hard it is to run a company there, the Word Bank recently placed India at 142 out of 189 countries when it comes to the ease of doing business in 2015. Now consider that China ranks 90.
It takes an average of 30 days to get a business officially registered in India, compared to just five in Canada. The total number of procedures required to register a firm in India is 13; here at home, it’s one. And those 13 are just to set up a firm.
The path of least resistance
Sandeep Narang says the single biggest hurdle is the time it takes to set up a business in India. “This could be due to many reasons including confusing laws, excessive paperwork, bureaucratic red tape and corruption. While most of the rules and regulations are well understood by local professionals—such as accountants, lawyers and advisors— the most important thing for a foreign business is to understand the Indian mindset: both that of partners as well as potential customers.”
Narang himself stays close to the Indian mindset, living in New Delhi, but he’s chairman of Anglian Omega Network, an umbrella group headquartered in Dubai with business ventures in beauty and lifestyle, commodities, manufacturing and financial services. He recommends partnering with Indian experts as a way to reduce or remove some of these barriers.
“The best way for a foreign entity to tackle such issues is to tie up with a professional Indian partner and work with them,” he says. “It is surprising how much easier it is for an Indian intermediary to identify the path of least resistance.”
Another operational irritant that takes time for business owners to get accustomed to is the glacial pace at which things work in India. While most metros, such as Mumbai, Delhi and Bengaluru, are becoming more Westernized and efficient in the way business is done, smaller cities still follow a very traditional and time-tested way of doing business. In a country as culturally, linguistically and traditionally diverse as India, it pays to hire or acquire local expertise.
“Foreign owners would do well to identify and meet with potential Indian partners who can help accelerate the start-up process, as well as iron out issues as they crop up,” says Dhruv Ratra, CEO of Anglian Omega Network. In the West, there’s a tendency to lump India with China—both are highly populated Asian countries with cheap labour and fast-growing economies. But India has some advantages for the investor.
“For starters, most Indians speak, or at least understand, English,” says Narang. “Culturally, India is more aligned with Western Europe and North America than is China, which makes it easier for a new business to understand and enter India.”
The key difference between the two countries is really the way they’re constituted, says Suneet Singh Tuli, president and CEO of DataWind. “Constitutionally, India’s democracy with a balanced socialistic and capitalistic view makes it an ideal place for investment,” he says. “Demographically, India has the advantage of young talent that not only aspires to succeed but also to spend.”
Tuli should know. His Toronto-based tech firm, which specializes in low-cost web access devices, has large-scale operations in India and has been doing business there since 2011. That was when it collaborated with the government to provide Indian students with the world’s cheapest tablet for under forty bucks. It’s currently listed on the TSX.
Tuli concedes, however, that the need for infrastructural growth is greater in India than China.
“Unfortunately, the [Indian] education system doesn’t produce industryready talent,” says Tuli. “For instance, of hundreds of thousands of engineers churned out every year, most are unemployable due to lack of industry-ready skills. This is a major area of concern that needs to be addressed by the government so they can really optimize the advantage of young demography.”
As well, India’s global reputation as an investment destination has suffered considerable damage due to its tax laws, which are inconsistent with the norm elsewhere. Major tax disputes with Indian subsidiaries of foreign firms —Vodafone, Nokia and Shell Oil, for example—have attracted widespread media attention and global scrutiny.
Critics charge that Indian tax laws have failed to keep pace with globalization. The rules remain opaque, overreaching and, in some cases, downright devious. In its Global Law and Business Perspective, business law firm Lewis and Associates out of San Francisco called India’s tax rules “Byzantine,” with one eye on the previous government’s infamous slapping of retroactive taxes on foreign firms.
Meanwhile, Prime Minister Narendra Modi claims his government will provide (eventually) predictable and stable tax policies for foreign investors. Until that happens, they’ll be a significant damper on business, says Tuli.
“The disparate tax structure across 29 states creates challenges for entrepreneurs not too familiar with the way things work in India,” he says. “[Foreign investors must] attain knowledge of the tax laws and practices and be more aware and gain knowledge about how each state operates.”
Waiting for them at the end is a wealth of market opportunities. In the tech sector alone, India has prospects in information communications, life sciences and clean technology, plus digital media, film and television.
Now 450 million being served
And “the new government’s renewed focus on infrastructure development and manufacturing in India may attract most interest,” says Tuli, who established a fabrication unit in Amritsar, a city in the northern state of Punjab.
India also has a rapidly growing demand for education services. With more than 450 million students, there are big opportunities to offer training programs through offshore branch programs and campuses in India.
Meanwhile, Trade and Invest British Columbia notes that, thanks to high mining costs here in North America, India’s mineral wealth makes an attractive alternative for meeting a growing global demand. As well, mining companies in India are finding it increasingly difficult to meet demand and are sourcing raw materials globally—which spells potential for joint venture.
All of that sounds wonderful if you can get around the excessive paperwork requirements, delayed approvals and confusing rules that can frustrate the hell out of the most patient entrepreneur. Dhruv Ratra suggests spending time to get to know the country and the people that you’d be dealing with, both partners and customers. “There is an example of a famous Scandinavian clothing company, one of whose directors visited India twice a year for five years before even starting a business there. Now they are one of the most successful foreign clothing businesses in India. This is because he understood the market and gained the trust of his Indian partners.”
Nothing magical about that.
Copyright 2014 Rogers Publishing Ltd. This article first appeared in the March 2015 edition of Corporate Risk Canada magazine