President Barack Obama's assertion in a recent speech that India "is not simply emerging but has emerged" underscores the huge potential the Indian market holds for U.S. and Western multinational companies. In the last 15 years, India has emerged to rival China as one of the world's fastest growing economies, with a burgeoning middle class eager to buy goods and services. Although its northern neighbor outpaces India in large-scale export-focused manufacturing and attracts more foreign investment,
India excels when it comes to its highly educated workforce, democratic institutions and less restrictive operating environment.
Indeed, the big threat that scared business away from India in the 1990s--the risk of the government expropriating assets and intellectual property-- has faded. Breakthrough economic reforms began in 1991, as the country migrated from socialism to capitalism, and continue apace, a mix of neoliberal policies governing international trade and investment, tax reforms and promoting deregulation. The Indian government gradually loosened restrictions against foreign-owned sales, services, entry and ownership. The market isn't completely open, of course, but what else would explain Starbucks' recent announcement that it is exploring the possibility of opening outlets in the country? Three years ago, the Seattle-based coffee chain pulled back on its intention to enter the market given uncertainty over government approval. Now that it has inked deals to acquire coffee beans from local producers, the talks are back on track.
Ask U.S. businesspeople about India then and now and the answers suggest two different countries. Fifteen years ago, Neil Schloss, treasurer and corporate vice president at Ford Motor Co., made his first visit to India. "I went there to set up a subsidiary of Ford Credit as a joint venture, and it was pretty archaic from the standpoint of how one conducted business," Schloss says. "There was a tremendous amount of paperwork and bureaucracy. In terms of financial institutions, other than the state-owned banks, I can recall Citibank and Deutsche Bank. They had shingles outside small buildings, and if they had air conditioning, it was an added plus."
"India has a huge population of more than 1 billion people and a rapidly growing middle class that numbers around 300 million," says Mukundan Iyengar, executive director of J.P. Morgan Treasury Services. "Labor is also relatively cheap comparable to other markets, and I mean skilled labor. The talent pool is pretty huge."
These draws first lured large U.S. and Western European multinational corporations and now are attracting midsize and smaller companies, says Manish Antani, vice chair of global services at law firm Barnes & Thornburg, which helps clients minimize the legal and regulatory risks of conducting business in India. "We've seen a substantial increase in the number of all types of different-sized companies in the Indian market, including automotive, pharmaceutical, general business consulting, IT, telecom and the companies that supply these sectors," Antani says.
Harding notes the particular burden of filing for a Permanent Account Number (PAN), required by the Indian tax department to limit tax fraud. PANs are mandatory if you want to open a bank account, receive taxable salary or professional fees, and sell or buy assets above specified limits. "A PAN is a way of switching presumed innocence to presumed guilt from a tax standpoint--an administrative exercise that is a real pain in the neck," he says.
Another hitch is real estate costs. "If you're thinking of purchasing or leasing real estate in the large cities, be prepared for expenses on par with New York City," Antani says.
Tenex Capital's Bedi says foreign investors face barriers in other industries, such as telecom, insurance and airlines, where businesses must be majority-owned and controlled by Indian companies. "Insurance, for instance, is limited to a 26% foreign ownership," he says.
And while foreign banks are now allowed to operate in India, the process is complicated. "The central bank requires you to obtain licenses to build brick-and-mortar branches," Iyengar says. "It's a challenge for every foreign bank, but at least we're all on the same level playing field."
Another nagging problem from a treasury standpoint is the slow growth of electronic payments. "In India in 2003, over 80% of all non-cash transactions were checks," says Bedi. "While electronic payments have grown by more than 50% a year, over half of all transaction volume remains checks, which creates check-clearing obstacles. You're collecting tiny amounts of cash or checks in remote areas where there are only local bank branches that can take weeks to clear them."
"Only 13% of Indians have debit cards," says Ford's Schloss. "A large portion of the population is still rural, compelling banks to expand in the villages. India's Finance Ministry recently asked banks to prepare a blueprint on their plans to reach villages with populations of 2,000 people and more."