As a fast-growing nation that also ranks as the world's largest democracy, India is an intriguing market for overseas businesses and investors. In recent years, the country, which has a population of 1.2 billion, has seen a surge in economic growth.
India's economy, which is Asia's third-largest, regained its status as the fastest-growing major economy in the world in the fourth quarter of 2017, surpassing China for the first time in one year. This spike in economic growth can be attributed in part to increased government spending, along with growth in the country's manufacturing and services sectors.
At the most recent World Economic Forum in Davos, Switzerland, Indian Prime Minister Narendra Modi said India aims to achieve a five trillion dollar economy by 2025. Modi, who was the first Indian prime minister to appear at the event in 25 years, also signaled that India is open for business, promising his government would be "removing the red tape and rolling out the red carpet."
India's vast market, recent political and regulatory reforms and surging economic growth make it an attractive market for businesses and investors. Despite this appealing combination, very real challenges remain for those seeking to do business in the country.
In order to successfully navigate these challenges, it's essential to plan strategically, perform due diligence, and exhibit patience and commitment to the process.
Why companies and investors are seeking to do business in India
Growth and investment
Indian economic growth has been exceptional recently, rising over 7 percent by the end of 2017, and projected to reach 7.4 percent in 2018—a figure that would be roughly in line with Mr. Modi's stated target. Reaching that figure will require that India's $2.3 trillion economy more than double by 2025. In order to help kick-start the process, India will be seeking to increase its levels of foreign direct investment (FDI).
The Indian government has eased FDI restrictions in a variety of economic sectors, including retail, real estate, aviation and power exchanges. It should be noted, however, that some of the country's protectionist tactics—such as raising tariffs on cell phones, automobile components and other products—raise questions about the level of India's commitment to market-friendly reforms.
Improved business environment
In addition to inviting greater levels of FDI, India has made significant progress in terms of improving its overall business environment. For the first time, India has placed among the top 100 nations in the World Bank's "Ease of Doing Business" global rankings. This improved ranking is largely due to India's progress in the area of implementing key market reforms.
India's ranking was an improvement of more than 30 places over the previous year's World Bank report. However, some observers have pointed out that India was one of the primary beneficiaries of a new methodology used by the World Bank when calculating the rankings and the addition of new countries into the index.
Despite this, the country's progress in this area under the current administration is undeniable. India was recognized as one of the ten most improved performers among countries in the index, earning marks for implementing reforms in eight out of the ten key indicators used by the index. India was the only large country to be recognized for this level of reform.
Annette Dixon, the World Bank Vice President for the South Asia region, praised India for its "strong reform agenda to improve the business environment." Dixon added that the reforms show that the country is serious about its mission to become "a preferred place to do business globally."
A common market
In addition to an improved business environment and greater foreign investment, India's 29 states now represent a common market. This is an important development, as the lack of a common market created a confusing jumble of taxes, delays of goods being shipped across state borders and opportunities for corruption.
In July, however, the system changed, with a new goods and services tax creating a common market. This is expected to boost efficiency and growth, while also increasing the government's tax revenues. Despite this change, companies should still be aware of the differences that exist across India's 29 states and seven union territories. Small and mid-sized foreign firms, in particular, should consider approaching India's markets on a regional level.
Infrastructure investments
Infrastructure improvements within India are also quite noticeable, as the country has been improving its bridges, roads, airports, ports, hospitals and power plants. One of the best examples of this new infrastructure push is the newly-created Andhra Pradesh state, which has seen extraordinary infrastructure spending. In just the last four years, India has increased its solar power generation capacity by 800-percent—achieving its target of 20 gigawatts four years earlier than scheduled. This is part of the country's push to catalyze up to $300 billion in new investments in renewable energy sources.
Massive consumer market and skilled workers
Finally, India has a large and healthy middle class, making it an attractive consumer market. Along with millions of consumers, the country boasts a young and highly-skilled worker base. The country's 10,000 engineering schools produce more engineers than the U.S. and China combined.
India also has demographics on its side, adding 10 to 12 million young people to its workforce annually.
Challenges of doing business in India
Corruption
Despite the significant advantages outlined above, India presents some very real challenges of which outside investors and businesses should be cognizant. First, corruption is a lingering problem within India.
The 2017 edition of the World Economic Forum's Global Competitiveness Report shows that Indian executives believe corruption is the most significant problem they face when doing business in the county. Foreign investors, likewise, report that corruption is a key consideration before moving into the Indian market.
Ease of doing business
Though progress has been made, India still lags behind many larger nations in critical metrics such as starting a business, enforcing contracts and securing construction permits. It actually takes longer to enforce a contract (1,445 days) today than it did 15 years ago—one reason why India ranks 164th globally on the securing contracts indicator.
India has, however, reduced the number of days needed to register a new business from 127 to just 30. Still, the number of steps required to start a business is quite cumbersome for most entrepreneurs. In the city of Mumbai, 12 steps are required—much more than the typical five-step average in high-income OECD nations.
The government is aware of this and has appointed four institutes (including the Indian Institute of Foreign Trade and the Institute of Chartered Accountants of India) to help meet with entrepreneurs and smooth the process.
A vast and fragmented market
The sheer size and fragmented nature of the Indian market can also present a challenge for investors and businesses. Indian states are often compared to individual nations, given their size and diversity in language, culture, talent and infrastructure. This creates considerable variance in business landscapes.
Additionally, regulations, rules, and policies can vary from state to state, as can subjective interpretations of prevailing laws. Cultural differences, too, must be understood and navigated. South India is wealthier and older, for example, while the northern part of the country is younger and poorer. North Indians prefer communicating in Hindi, while southern Indians use English or their respective state language for business transactions.
Safeguarding intellectual property
Finally, it's important to understand intellectual property issues within India. Although local laws are thorough and generally compatible with EU and U.S. IP laws, there is some concern with regard to enforcement of these laws.
Bureaucratic delays (IP enforcement cases can take years to wind through the courts) and a general lack of transparency are both areas of concern in terms of protecting sensitive intellectual assets.
Conclusion
The challenges of operating in a new country are often daunting—regulations are constantly evolving and no business landscape remains static. Without a solid grasp of the issues at hand, businesses are exposed to tax penalties and even the prospect of civil or criminal litigation.
If you are considering entering the Indian market, it is critical to have an experienced partner with a global footprint. CT has a worldwide network of offices and partners who will make sure your local needs are met, accurately and on time.
CT can help you get set up, provide a single point of contact and provide you with customized solutions for all your needs. We’ll help to ensure you have the right support tailored to your global needs.
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