BUSINESS SENSE: Prime Minister Narendra Modi has implemented a number of reforms to stimulate growth.

It’s 15 years since the BRICs concept highlighted the new world order among emerging markets. But while Brazil, Russia, and now China, have slid backwards, India has come to the fore.

In the complex and intertwined worlds of geopolitics and economics, no one would suggest a single influence is driving India forward. Yet the emergence of business-oriented Prime Minister Narendra Modi – who won a landslide general election in May 2014 – is thought to be an important factor in the country’s recent remarkable growth.

Before Modi’s success at the polls, it had been 30 years since a single party had won an Indian general election; and so, for three decades, coalition governments ruled the country, the last of which ended its decade in office mired in legislative stagnation.

Modi’s win, however, has shaken Indian politics to its foundations. His Hindu nationalist Bharatiya Janata Party (BJP) won the 2014 election with such a convincing majority that he has no need to placate coalition partners. Both conservative and pro-enterprise, the BJP is free to drive an agenda that appeals equally to India’s business community and those overseas corporates eager to increase their stake in such a fast-growing economy.

India

Population: 1.28 billion

GDP (April 2015): $2.308 trillion

World Economic Forum‘s Global Competitiveness Index: 71st place (out of 144 countries)

World Bank‘s Ease of Doing

Business ranking: 142nd (out of 189 countries)

GDP growth 2015–2016: 7.9% (Citigroup forecast as of June 2015)

DHL Global Connectedness Index: 71st place (out of 140 countries)

Then there is Modi himself. He has impressed as a charismatic and fiercely hard-working individual, whose speeches underline his determination to increase foreign direct investment (FDI) and highlight his commitment to drive out the corruption which has dogged India’s bloated public sector for decades. Modi is also clearly determined to make manufacturing a key economic driver, especially through his ‘Make in India’ initiative, which looks to stimulate investment and innovation in order to tackle the country’s huge skills deficit and create jobs and wealth throughout the economy.

The program has already scored notable high-profile successes. For example, Bangalore-based Dynamatic Technologies has now produced its first set of parts for Boeing’s Chinok helicopter from a plant set up in India last year; while Airbus has announced that it is awarding its aero- components production contract to Mahindra Group, owner of India’s biggest sport utility vehicle maker. Then, in May, as if to provide an extra boost, figures showed a 56 percent jump in FDI in the five months since Make in India was launched.

With May’s manufacturing output at a 2015 high – and with manufacturing GDP having grown 7.1% in 2014/2015 – it appeared Modi’s policies were taking swift effect. As his first year in office ended, India was squarely on course to overtake China as the world’s fastest-grow-
ing major economy, with the latter suffering a double whammy of falling domestic demand and lower exports. In 2014 to 2015, Chinese gross domestic product (GDP) grew 7.5%, compared to India’s 7.3%; yet in May of this year, it was announced that India’s GDP had grown 7.5% during the January to March period, faster than China’s 7%  – and partly because of improvement in the manufacturing sectors.

June brought further good news for Modi, as the
Reserve Bank of India cut its “repo rate” – the rate at which its central bank lends funds to commercial banks – for the third time in 2015. The closely-watched HSBC Markit Manufacturing Purchasing Managers’ Index – which tracks orders, output, employment and prices – also rose, emphasizing that sector’s buoyancy and the impact of increased FDI.

Policy initiatives

However, although India’s headline GDP data continues to impress, Anuj Chande, head of Grant Thornton’s South Asia Group, counsels that expectations shouldn’t be allowed to run unchecked. “There’s no doubt Modi has made sensible decisions in terms of policy initiatives, and his messages have been well received by business,” he says. “But in terms of on-the-ground reality, the impact will take time to be seen.”

A crucial element will be the introduction of the Goods and Services Tax (GST), which has been called “the single most important tax reform initiative in India since independence. (see box: India‘s GST Bill). Currently, each of India’s 29 states imposes an archaic structure of indirect taxes and tariffs on goods and services crossing its borders – at huge cost to business. GST, however, would abolish these charges, simplify the tax structure and create a single, unified market – yet it has long been delayed, with the result that target dates of its implementation in 2010 and then 2013 have been missed. That’s unfortunate, admits Chande. “The present system is a complex and confusing burden on business,” he says “and to harmonize and simplify the structure would have been a real bottom-line benefit.”

Nevertheless, the lower house (Lok Sabha) of the Indian parliament did pass a GST amendment Bill in May of this year, and Modi’s finance minister, Arun Jaitley, is bullish that the legislation will come into force in April 2016.   However, as the opposition Indian National Congress (INC) party and its allies dominate the upper house of the Indian parliament (Rajya Sabha), Chande thinks there’s still a lot of work ahead before the Bill is made into law.

MAKE IN INDIA

PM Modi launched his ‘Make in India’ initiative in September 2014 – with the symbolic logo of a lion constructed from cogs – aiming to take on China’s mantle as a global manufacturing powerhouse. He has since asked the world’s leading industrial nations, including China, Germany, the United States and the UK, to come to India, with key reform pledges to attract overseas manufacturers, including less regulation, massive infrastructure investment and simplified corporate tax structures. Modi’s aim is to transform the domestic economy, create value-added jobs and increase employment and wealth levels, but also to turn India’s manufacturing sector into a global exporting hub. Critics believe a ‘Make for India’ strategy would work better with a focus on manufacturing products designed and made for Indian consumers.

“For me, 2016 is optimistic,” he says. “Yes, there’s been a lot of good news and Make in India is already generating significant FDI, especially in electronics, pharmaceuticals and automotive. There’s also been a tremendous focus on making sure corruption is no longer a barrier to business growth, and putting more government licenses online will certainly underpin that strategy and streamline those processes. My concern is that the government is still very much a one-man band. It needs more experience and particularly more technocrats if the policies are going to be delivered. Although, saying that, this is the most optimistic period for India that I can recall in the last 25 years.”

Skills and investment

India’s e-commerce sector is another hugely buoyant sector with massive potential. “There are around 250 million smartphone users, who are typically young, upwardly mobile and comfortable going online to carry out transactions; although, because only a third of Indians have bank accounts, many still want to pay cash on delivery which presents obvious challenges,” says Grant Thornton’s Chande.

Online commerce is now attracting swathes of customers from Tier Two and Tier Three cities – outside India’s core urban areas – and recent varying estimates value the Indian e-commerce market anywhere between $50 billion to $130 billion by 2020. India’s e-commerce business model thrives on discounts, relative to prices being asked by traditional ‘bricks and mortar’ players; and even though the revenue numbers are huge, online purchases are still only around 1% of the market, so the potential remains massive.

ONLINE ORDERS: e-commerce is now attracting customers from outside India’s core urban areas.

However, much of the traffic is being driven by one-time sales. In October 2014, India’s largest e-commerce player, Flipkart, notched $100 m in revenues in just 10 hours, after its Big Billion Day, and such huge spikes in demand pose significant challenges to the logistics sector. Many of India’s e-commerce customers are placing multiple orders for the same product, paying for the first to arrive and then sending the rest back, making returns a major challenge for even the largest logistics provider.

“We’re making between 150,000 and 160,000 deliveries per day, so we’re refining our delivery options to give customers more choice,” says Malcolm Monteiro, CEO for DHL’s eCommerce operations in Asia and the Pacific. “The e-commerce firms are looking to win loyalty and build their brand through discounts; but in logistics you must constantly focus on improving the customer experience across all touchpoints.”

SCIENCE APPLIANCE: A technician checks mobile phones at the Chinese Celkon manufacturing plant in Hyderabad.

New competition

Analysts have so far concentrated on India’s pure e-commerce players, with Snapdeal chasing the market leader Flipkart, which – like Amazon – began as an online bookseller. Both are attracting investors on a global scale, and their backers accept they won’t get a return for 15 or even 20 years, because they’re making a long-term bet on the Indian market. But now there is the prospect of new competition.

“As the market begins to mature, I wouldn’t be surprised if we saw some of the bricks and mortar retailers, which have been sitting on the sidelines, decide to come in with a real bang,” suggests Monteiro. “As the e-tailers eventually start to reduce their discounts, they’ll have to offer more value-added services to retain their customers – perhaps through flexible delivery options or cash on delivery payment – so it will be very interesting to see which company gets the balance right between margins and volume.”

Prime Minister Modi has made sensible decisions in terms of policy initiatives, and his messages have been well received by business. Anuj Chande, head of Grant Thornton‘s South Asia Group

Vikas Anand, CEO, DHL Supply Chain in India, shares the view of Grant Thornton‘s Chande that delivering the GST bill into law by 2016 will be a challenge, and considers 2017 more likely. As overseas manufacturers look to learn more about Make in India and assess the scope for FDI projects, he also stresses that it would be a mistake to treat India as a single entity.

India‘s GST Bill

For decades, India‘s federal structure has allowed individual states to impose their own tariffs, indirect taxes and levies on all goods and services crossing their borders, creating inefficient and costly burdens for business. The Goods and Services Tax (GST) bill aims to remove them all and impose a single and transparent national tax structure. Finance Minister Arun Jaitley has described the legislation as the “biggest tax reform” since modern India was created in 1947. 

“If you are new to India, you should think of it like the European Union,” he says. “There are 29 states, many of them as big as single countries elsewhere, and until GST is achieved, each will have its own system of tariffs, duties and taxes, which is a major challenge for anyone in a supply chain. We’ve seen the domestic market driven by demand for fast-moving consumer goods (FMCG), which typically end up in small warehouses in each state. At the moment, most Indian supply chains are still fragmented, but change is coming, especially from the retail (including online) sector; and I’d expect to see more larger warehouses, and the consolidation of inventories, as manufacturers look to drive greater efficiencies into their operations.”

Its potential may not have been fully realized yet; and there is plainly more to do in terms of financial reform and physical infrastructure. But, increasingly, India is shaking off the shackles of its economic and political past and facing the future with renewed confidence and optimism. And that can only be great news for companies who want to do business there. — Ian Halstead

Published: September 2015

Photos/Infographics: SZ Photo/Jose Giribas, Hannover Messe/dpa, Getty Images, NOAH SEELAM/AFP/Getty Images