In mid-February 2016, Indian Prime Minister, Narendra Modi, gave a speech in Mumbai on the launch of the “Make In India Week”:
“This is the biggest brand India has ever created. When I look back at the launch of the Make in India initiative over a year ago, I also recall the aspirations of our youth: 65% of the population of India is under the age of 35. This youthful energy is our greatest strength!”
In mid-April 2016, I attended a seminar in Milan(*). Ashish Gulati (partner at Translink India – BMR) was giving a presentation on “Growing your business in India”. He opened his presentation stating that India overtook China to become the fastest growing economy in 2015 and that India’s contribution to global growth is expected to be larger than the combined contribution of the G7 nations by 2018. The country’s GDP growth outlook (2016) is 7.5% according to the IMF – International Monetary Fund – and 7.8% according to the World Bank (forecasts for China are respectively 6.3% and 7.0%). He also highlighted three main data about India:
- a young country: average 29-year-old by 2020;
- about 28% of world workforce, by 2020;
- 68% of the population will be “working age” by 2030 (overtaking China).
Figure 1 – INDIA GDP growth 2003-2015
THE INDIAN GROWTH
So, why are there these expectations? Gulati summarized the reasons well: “From red tape to…red carpet for foreign investors”. He explained that India has adopted four strategies to push the country’s growth: new processes (enhancing ease of doing business); new infrastructures (developing industrial corridors and smart cities); new sectors (identification of key sectors and opening up to foreign direct investments); and a new mindset (Government as a “facilitator” not a “regulator”).
But let’s see in practical terms how this strategy is enacted.
First: in 2014, India launched an ambitious program of regulatory reform aimed at making it easier to do business. Such programs represent a great deal of effort to create a more business-friendly environment, particularly in Delhi and Mumbai.
Second: the “Make in India” initiative is aimed at encouraging international, as well as national, companies to manufacture their products in India. The major objective behind the initiative is to focus on job creation and skill enhancement in 25 sectors of the economy, from automobiles to electrical machinery, to railways, tourism & hospitality etc. etc. The initiative also aims at high-quality standards and minimising the impact on the environment. The initiative hopes to attract capital and technological investment in India.
Third: the “Golden Quadrilateral” and the “Delhi-Mumbai Industrial Corridor”. The “Golden Quadrilateral” is a highway network connecting many of the major industrial, agricultural and cultural centres of India. It was launched in 2001 and completed in 2012. The “Delhi-Mumbai Industrial Corridor” is one of the world’s biggest infrastructure projects with an estimated investment of US$90 billion, and is planned as a hi-tech industrial zone spread across seven states along the 1,500 km long Western Dedicated Freight Corridor which serves as its backbone. It includes 24 industrial regions, two airports, five power projects, two mass rapid transit systems, two logistical hubs and eight smart cities.
Fourth: the “Smart Cities Mission”. In 2015, the Ministry of Urban Development launched the project to develop 100 cities all over the country, making them citizen friendly and sustainable. The program (€7 billion by 2020) is based on improvement (retrofitting), city renewal (redevelopment) and city extension (greenfield development).
Last but not least: “Digital India”. This is a campaign launched to create digital infrastructures, to deliver digital services and to provide digital literacy.
DEMOGRAPHICS & URBANISATION
According to the “Smart Cities Mission”, as per estimates, about 25–30 people will migrate every minute to major Indian cities from rural areas in search of better livelihood and better lifestyles. With this momentum, about 843 million people are expected to live in urban areas by 2050. To accommodate this massive urbanization, India needs to find smarter ways to manage complexities, reduce expenses, increase efficiency and improve the quality of life.
The “Smart Cities Mission” is based on the concept that cities are the engines of growth for the economy of every nation: “Nearly 31% of India’s current population lives in urban areas and contributes 63% of India’s GDP (Census 2011). With increasing urbanization, urban areas are expected to house 40% of India’s population and contribute 75% of India’s GDP by 2030. This requires comprehensive development of physical, institutional, social and economic infrastructure. All are important in improving the quality of life and attracting people and investments to the city, setting in motion a virtuous cycle of growth and development. Development of Smart Cities is a step in that direction”.
India accounts for 2.4 % of the world’s surface area and 17.5 % of the world’s population. The population witnessed a growth of 17.6% during 2001-2011 (absolute terms: 182 million), a decrease from 21.5% during 1991-2001. According to India Census 2011, over 31% of India’s population resided in urban areas, from 28% in 2001 and the migration towards cities will be much greater in the decades to come.
At the Mumbai IEE Expo 2016 (17-19 March 2017), Shanker Gopalkrishnan (MCG – Madras Consultancy Group, Chennai) provided some interesting data on the Indian economy and in particular on the building and construction sector. He underlined three main data points:
- the construction sector is a leading employment generator, next only to agriculture, providing employment to around 30 million people (2015);
- the construction sector contributed around INR 8,180 billion (€1,110 billion) to the country’s GDP in 2013-14; accounting for 7.2% of the total GDP;
- economic growth and urbanisation have led to a burgeoning demand for urban residential and commercial space.
In his presentation, Shanker Gopalkrishnan highlighted the driving forces of the construction industry (buildings 52% and infrastructures 48%). In the first place, he mentioned the “Smart Cities Mission”. The Indian Government recently announced the list of 20 cities (out of 100) selected to be taken up for “Round 1” of the program. The plan is in an early stage phase, but the potential is very high, and it will involve: satellite cities of larger cities, most of the cities in the population range of 1-4 million people; all State/Union Territories capitals; cities of tourist, religious and economic importance; 25 more cities in the 0.2-1.0 million population range.
He then went on to mention some of the main infrastructural projects. Among these, the metro rail/monorail development plan: some are already operational (Bangalore, Chennai, Delhi, Gurgaon, Jaipur, Kolkata, Mumbai), 21 others have been approved and 30 more proposed. Moreover, there are 14 airport expansion projects, plus 17 new ones.
Developing business in India
Back to Indian Prime Minister Narendra Modi speech in Mumbai: “We launched the Make in India campaign to create employment and self-employment opportunities for our youth. We are working aggressively towards making India a global manufacturing hub. We want the share of manufacturing in our GDP to go up to 25% in the near future. We are committed to making India an easy place to do business. We want to present to the world the enormous opportunities that India offers as a base for manufacturing, design, research, and development”.
Such a powerful statement!
In practical terms, let us return to Ashish Gulati and his presentation in Milan. “There are three possible strategies for European players in India:
- The first is to establish a wholly owned subsidiary in the country;
- The second is to create a greenfield joint venture with an Indian partner;
- The third is to acquire stakes in an Indian player”.
He then explained the pro and cons of the different options. Wholly owned subsidiary. In favour of this option, there is the complete control over business; technology and/or industrial property do not have to be shared with another partner; it avoids any post-merger/acquisition integration issues. On the other hand, this choice has a longer gestation period (setting up a facility may not be easy), and distribution/supply networks have to be established.
Greenfield JV. The pros are as follows. This might be preferred in the event of a new product line being introduced or dedicated to a particular customer set; the domestic partner can contribute local market experience and distribution/supply channels. Cons: in this case too, the gestation period is longer (obtaining new licenses and approvals may take time).
Acquisition of stake in an Indian player. Four reasons in favour: established manufacturing/distribution infrastructure; domestic customer relationships; the experience of local operations; and immediate market share. Three against, which are: cultural integration is needed; capital expenditure may be needed for expansion and/or to improve the quality of assets; there is the possibility of potential “hidden” liabilities.
Choose your own option, but keep in mind the fact that the market is there.
Up to now, we have described India as a kind of business heaven. It is not so. Or better yet, it is not wholly a heaven.
Let’s go through it. For sure, India is the fastest developing country in the world. In 2016, India GDP is expected to be +7.5%, ahead of Vietnam +6.6% and China +6.5%. But if we look at the poverty line, India suffers from substantial poverty. In 2012, the Indian government stated that 21.9% of its population was below its official poverty limit, which is backed up by the United Nation’s Millennium Development Goal (MDG) who says this part of the population lives below the poverty line of $1.25 per day, on Purchasing Power Parity (PPP). The situation is better in comparison to 45.3% (1993). This means that some 270 million people are below poverty line. This means that about one-fifth of Indian population lives with some 20 rupees per day (about €0.25), most of them working in “informal labour” sector, with no job or social security, “living in abject poverty”.
According to the 2011 Indian Census, although the number of child labourers (5-14 years) in India may have declined since 2001, an underage workforce still forms from 2% to 4% of regular worker population.
As the economy grows, the real challenge is still poverty.
To quote another example, we mentioned large investments in infrastructures. Well, only 78.7% of the population has access to electricity (in the EU, it is 100%). Today, nearly half of health facilities in the country have no access to electricity at all. The number of infants dying before reaching one year of age is 38 per 1,000 live births, closer to Ethiopia (41) rather than Italy or Germany (3)(**).
As the economy grows, the real challenge remains developing the country.
Conclusions? Yes, India has its own shares of problems, but “India has a business model that is solid (…) In other words, there is potential for growth. There is a growing population. There is a scale market. There is determination to reform. There are technological breakthroughs, and there is creativity at play in an economy that is on the road to growth”.
These are not my words but Christine Lagarde’s, managing director of the IMF – the International Monetary Fund.
(*): M&A: A winning strategy for international growth – Development opportunities for Italian companies” Milan, Italy, 21 April 2016
(**): Source: http://data.worldbank.org/indicator/SP.DYN.IMRT.IN/countries