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The Indian Market

Published by Other on 2006-03-01

OVERVIEW

The American business community has an unprecedented opportunity to flourish in the growing Indian consumer and securities markets. This opportunity comes at a time when political relations between the United States and India appear to be rapidly improving - creating a more hospitable climate for American investment and commerce in the world's biggest democracy.

This opportunity also comes when India is making the transition from being one of the world's poorest countries to one with a dynamic economy and a robust consumer market that takes timely advantage of globalization. India is expecting to attract more foreign investment, and to substantially boost its exports, particularly to industrialized nations such as the United States, which is already its biggest trading partner.

With the forthcoming visit in July of Prime Minister Manmohan Singh to Washington to meet with President George W. Bush and address Congress, the U.S. and India both have a unique opportunity - after long years of mutual distrust - to strengthen their economic, political and military ties.

Indeed, recognizing India's strategic and economic significance, and its relatively recent openness to foreign capital, President Bush has extended more good will to India than any American president. He is also scheduled to visit India later this year. Indians had long resented Washington's ambivalence toward their country, and America's embracing of its neighbor and enemy Pakistan - first as a bulwark against the erstwhile Soviet Union's ambitions in Asia, and later as a staging ground against international terrorism.

The good will displayed by Mr. Bush has resonated well in India, which is among the very few states of the 191-member United Nations where the president is actually a popular figure. That good will was also reflected during a visit to India last March by Secretary of State Condoleezza Rice and in recent comments by numerous Bush Administration officials, including Secretary of Defense Donald H. Rumsfeld.

Prime Minister Singh, a prime architect of India's recent economic reforms, is keen to build on this good will and persuade more American investors to bring capital to India to strengthen its languishing infrastructure and expand the manufacturing sector.

During his visit to the U.S. - when he's also scheduled to meet with business leaders - Mr. Singh is certain to emphasize India's attractions for foreign businesses. These include a large and educated English-speaking work force, relatively low wages, an increasingly affluent middle class of 400 million people - the world's biggest such cohort - governmental guarantees for the repatriation of profits as well as investments, protection from expropriation of property, and the fact that, like the U.S., India is a vigorous multi-party democracy with a free press.

Compelling as these features are - and although economic success is certainly within its grasp - sustained progress in India is by no means assured. Notwithstanding their newfound enthusiasm for India, foreign investors and entrepreneurs face daunting hurdles.

A key problem is the political viability of Mr. Singh's coalition government, a 14-party patchwork of the durable Indian National Congress and other smaller groupings, that survives on account of support from Communists in the 545-member Lok Sabha, the lower house of parliament. Mr. Singh's efforts to speed up economic liberalization and give foreign investors greater participation in local companies has met with stubborn resistance from some of his populist coalition members. Thus, further liberalization may be fitful until such a time when the Congress - or some other party favoring free enterprise - gains a majority in parliament. Unless Mr. Singh's coalition collapses, new parliamentary elections aren't expected until 2009.

Moreover, despite growing foreign interest in servicing an effective transition to a more productive economy can only happen if India dramatically improves the infrastructure.

Communications are still spotty, although 48 million Indians now own mobile phones - the number of mobile-phone subscribers has exceeded that of land-line phone in homes and businesses. (The number of mobile phones is expected to surge beyond 125 million by the end of 2006.) Power shortages have long hampered industrialization. Roads are generally of poor quality. Seaports are inefficient. Airports are dilapidated. Lack of water has bedeviled agriculture, especially in the vast rural hinterland where more than 700 million of India's 1.1 billion people live. There is excessive reliance on the monsoons, and on rituals to invoke the blessings of deities in a predominantly Hindu country. Health and education services are primitive in many of these rural regions, home to 575,000 villages. Some 58 years after India's independence from two centuries of British rule, life hasn't changed much for hundreds of thousands of peasants.

Perhaps the most troubling factor for foreign investors is that India remains a hard place in which to do business. Corruption is deep-rooted virtually everywhere. It is customary for cabinet ministers to expect emoluments from those who seek to enter the Indian economy. And although the liberalization of the last decade has resulted in the gradual abandoning of economically-crippling socialist policies that dominated the polity since independence, India's huge bureaucracy retains enormous decision-making power concerning the economy. India is still a land of permissions and approvals that are often subject to the caprice of powerful bureaucrats. Transparency International, the Berlin-based watchdog, has named India has being one of the world's five countries with the most corrupt political parties.

The "License Raj" - supposedly consigned to history along with Fabian socialism espoused by founding fathers such as Jawaharlal Nehru - continues to be a deterrent for business. For example, it takes 22 days to start a business in Korea; in China, it takes 41 days. But in India it takes 89 days. And enforcing a contract takes 425 days in India, more than five times longer than Korea and nearly double that in China. There is also the growing phenomenon of the "Inspector Raj," where government monitors who are dispatched to industrial sites frequently shut down production unless gratuities are paid.

India's complicated federal system often spawns conflicts among the governments of the country's 35 states and territories. These conflicts range from the question of sharing river waters to local security measures. Some states, such as Maharashtra, Gujarat and Punjab, are considerably more advanced economically than Uttar Pradesh, India's biggest state at 175 million people. And some of the most backward states, especially in the country's northeast region, have huge amounts of natural resources but little capital to tap them for sustainable economic development.

Notwithstanding such constraints, sectors such as information-technology (IT), tourism, biotechnology, and call-centers servicing foreign companies are expanding rapidly, contributing to a dramatic growth in India's annual hard-currency income: annual exports in 2004 were a record $80 billion - mostly from software, textiles, chemicals, engineering goods, and pharmaceuticals - and are expected to grow to $92 billion this year., according to Commerce Minister Kamal Nath. Mr. Nath also estimates that India's exports would rise to $150 billion before 2009.

This is largely on account of the enterprise and innovativeness of the private sector, whose inventiveness in coddling the bureaucracy or maneuvering around it has been remarkable. Foreign-exchange reserves are at a record high at $139 billion, but so is India's external debt, which is $121 billion. Consumerism is on the rise as foreign brands and Indian knock-offs are more readily available.

For those American businessmen willing to endure the initial difficulties of entering the Indian market, the prospects for expansion and profits are dazzling.

They will surely be encouraged by what Prime Minister Singh said not long ago: "We must think big and bold. We must move away from the paradigm of incremental growth to a paradigm of exponential growth and growth into uncharted territory."


WHAT INDIA WANTS

With more than 75 percent of India's population under the age of 35, Prime Minister Singh and his closest aides recognize that the country needs to accelerate its economic growth rate to meet popular expectations. With the explosion of cable channels - some 500 are available in the capital city of New Delhi alone - contemporary global lifestyles, attire and accouterments are everyday images in Indian living rooms.

For most Indians, these lifestyles and purchases are unattainable in present circumstances. (The per capita income is $450.) But the dramatic expansion of jobs in the IT and financial-services sectors, telecommunications, tourism, and the automobile industry, has spawned an increasingly affluent middle class that has discretionary income for consumer goods. A credible estimate - based on buying trends - suggests that this middle class, concentrated in India's large cities and burgeoning towns, has more than 400 million people. This would make it the biggest middle class in the world, almost twice the entire population of the U.S.

Indian leaders have also recognized, however belatedly, that the Fabian socialism imposed by Nehru - independent India's first prime minister - did not alleviate poverty. Egged on by the main contributors to his Congress Party, five or six indigenous Indian industrial families, Nehru discouraged foreign investment in India. He opted for government control of the "commanding heights" of the economy - which is to say, the government built or managed virtually everything from steel mills, dams, civil aviation, telecommunications, hotels, insurance companies, and banks.

Nehru's daughter, Indira Gandhi, continued this tradition when she became prime minister. It was only well after her assassination by Sikh bodyguards in October 1984 that her son, Rajiv Gandhi - who succeeded his mother as prime minister - began to dismantle some of the bureaucratic controls over the economy. He met with fierce resistance from the entrenched bureaucracy (more than seven million people are officially categorized as "bureaucrats" in India). A commercial pilot by profession, Gandhi was hopelessly outmaneuvered by political colleagues allied with powerful bureaucrats. His signal contribution was in the introduction of computers in federal government offices.

Rajiv Gandhi was assassinated in May 1991 by Tamil rebels based in neighboring Sri Lanka, where a civil war between minority Tamils and majority Sinhalese had been raging. (It is still unclear why Rajiv was targeted by the Tamils.)

The man who became prime minister shortly thereafter, P. V. Narasimha Rao, is to be credited with initiating economic reforms which eventually resulted in a far more open system. Mr. Narasimha Rao's finance minister was Manmohan Singh, a one-time leftist economist who became widely known as the brains behind Mr. Rao's reforms. A series of opposition-led governments were subsequently in office through the 1990s; some of them supported the Rao-Singh reforms, which included cutting back on subsidies for staples, trimming the bureaucracy, lowering punitive taxation on companies and their executives, and lessening the license load on industrialists.

When Mr. Singh became prime minister in May 2004, there were great expectations that he would speed up economic reforms that he had drafted in 1991. But from the very start of his administration, it was apparent that there would be less velocity to progress than he would have wanted. That's because leftist members of the Congress-led coalition often agitated against reforms perceived as helping the private sector and foreign entrepreneurs. Under the banner of populism, they undercut job-generating policies that would have benefited millions of Indians mired in poverty.

Still, Prime Minister Singh has been persistent about opening up the Indian economy. His finance minister, Harvard-educated Palaniappan Chidambaram, offered substantial tax breaks in the 2005 budget. He and other cabinet officials such as Commerce Minister Kamal Nath have been traveling around the world to woo investors.
They have encountered growing interest among investors, particularly from the U.S., where Indian entrepreneurs and software programmers have gained acclaim in Silicon Valley. (The founder of Hotmail.com is an Indian.) Practically every major American computer-related company has set up offices or production plants in India: Dell, Microsoft, Intel, among them. The Indian IT sector's exports grew by 32 percent in 2004, and this year the figure is likely to be higher.

In a recent speech in Mumbai, the managing director of the International Monetary Fund, Rodrigo de Rato, said: "While a rising home-grown demand is playing some role in the IT sector's growth, the story is overwhelmingly one of India competing-and winning-in the globalized economy. With Indian firms exporting services ranging from call centers to medical diagnostics to tutoring of American high school students, India's position of world leadership in IT is well known. A few years ago, when the IMF decided to overhaul its financial systems, we searched the world for the best firm to do the job. In the end, we settled on an Indian firm, a state of the art company that provided good value as well. Moreover, the IT success story is largely one of private sector initiative. Indeed, the government deserves credit for stepping back and focusing on providing an enabling environment for private initiative."
As Indian emissaries travel the world, they highlight six key aspirations (which are likely to be reflected in Prime Minister Singh's discussions in July with American political and business leaders):
The primary goal is to transform the country into an economic superpower through accelerated growth in manufacturing, IT, bio-technology and agro-industries. As a country already possessing nuclear weapons, India also seeks to expand the use of nuclear technology to generate more electricity, which its economy sorely needs. To qualify as a superpower, India would need to have a gross domestic product of at least $3 trillion; the current figure is $675 billion. That means the annual economic-growth rate, currently around 6 percent, would need to be between 8 and 10 percent annually for the next decade, a formidable challenge. At the same time, India needs to pay greater attention to its agricultural sector, which accounts for two-third of the GDP. More rural cooperatives are sorely wanted by farmers, and also more agro-industries that would create jobs.

The second goal is to attract more foreign investment. Currently, India gets just about $4 billion in FDI annually, compared to $54 billion for China, and $8 billion for Thailand (which has a population of 65 million). In 2003, the stock of FDI to India totaled just 5 percent of GDP, compared to 31 percent for Thailand, and 35 percent for China. At the same time, surveys by the Paris-based Organization for Economic Cooperation and Development (OECD) suggest that India may become one of the top two or three destinations for FDI in the coming years. A bright spot is India's tourism sector, which fetched $4.9 billion in 2004, a gain of $1.6 billion over the previous year. Another bright spot for earning foreign-exchange is the remittances that overseas Indians - of whom there are reported to be 22 million, 2 million in the U.S. alone - send to their homeland. The U.S. accounted for nearly 50 percent of the $19 billion that India received in 2004 from non-resident Indians (also known as NRI's). The figure for 2005 is expected to be $8.6 billion. Similarly, foreign investment in Indian equities is on the rise. The figure for 2004 was more than $9 billion in investment by foreign funds, and it's expected to rise substantially this year - even though no foreign investor is permitted to acquire more than 49 percent of shares in any Indian company. The OECD said that FDI generally is on the rise: The world's 30 industrialized countries invested $667.8 billion in manufacturing, real estate and companies in foreign countries in 2004, a 12 percent increase from 2003. The U.S. was the leader by far in FDI last year, with a record $252 billion invested abroad, an increase of 80 percent from 2003.

The third goal is to alleviate, if not eliminate, crushing poverty. Government figures indicate that the poverty rate fell from 41 percent in 1992-93 to less than 29 percent in 2000. That's nearly 400 million people who subsist on the equivalent of less than $2 a day. In the commercial capital of Mumbai - formerly known as Bombay - slum dwellers are said to number 6 million, or half of the city's total population. The national unemployment rate has hovered at 12 percent for several decades. With an annual population growth of 18 million - the size of Australia's population - India will need to create 100 million new jobs in the next 10 years just to keep that rate from rising. Because of rural unemployment, villagers keep streaming into India's cities, which are already bursting at the seams. For example, more than 10,000 people are said to migrate to Mumbai every week. Not only are there no jobs for most of them, there isn't adequate housing either. Many of the newcomers - especially women from as far away as Nepal - are snared by prostitution rings. Little wonder that the prevalence of HIV/AIDS has soared in India. The World Health Organization estimates that India, with 5.3 million known AIDS patients, will soon surpass South Africa, which currently has the world's highest number of AIDS-afflicted people - 5.4 million.

A fourth goal is to fashion a peace with neighboring Pakistan, an Islamic theocratic state with which secular India has fought four wars since both nations were carved out of the Subcontinent by the departing colonial power, Britain, in 1947. Defense expenditures are draining the economies of both countries, diverting resources that would otherwise have gone toward social expenditures. For example, India allocates $18 billion of its annual budget of $104 billion to defense; nearly a third of Pakistan's budget of $20 billion goes toward defense. The main dispute between the two countries is over the mountainous territory of Kashmir, which both India and Pakistan claim. With American prodding, the two antagonists seem to be making progress over resolving the issue - which in effect would mean that Pakistan would retain a third of Kashmiri territory that its vassals occupy, and India much of the rest. (China grabbed a portion of northeast Kashmir and refuses to give it up.)

A fifth goal is for India to obtain a permanent seat in the 15-member United Nations Security Council. UN Secretary General Kofi A. Annan recently proposed an expansion of the Security Council to include key states such as Japan, India, Brazil and Germany. India has long lobbied for a permanent seat on the Council, not just a two-year rotational one. In part, this is an effort to reclaim its prominence during the cold war era when India led the grouping known as the Nonaligned Movement (NAM). NAM's avowed aim was to stay neutral in the global struggle for influence between the U.S. and the Soviet Union. In practice, many NAM members - including India - tilted toward the Soviets, frequently inviting the displeasure of Washington. With the fall of the Berlin Wall and the disintegration of the Soviet Union, NAM members are struggling to latch on to a cause. India seeks to re-exert its leadership, this time as a major model of sustainable human development. However, Washington has been less than enthusiastic about supporting India's bid for a permanent seat on the Security Council, a matter that Prime Minister Singh is certain to raise with President Bush.

A sixth goal is to increase India's global trade, particularly with the U.S. Some 22 percent, or $15.5 billion, of India's annual exports of $80 billion go to the U.S. The latter sells merchandize worth $6 billion to India. Both sets of figures have increased substantially over the last five years, sometimes in excess of 20 percent a year. At the same time, a thawing in relations between China and India has resulted in a huge increase in bilateral trade between the two countries, which fought a war in 1962 over disputed Himalayan territory. From barely $1 billion 10 years ago, two-way trade has jumped to $14 billion; it is expected to climb to $30 billion in another five years. India is actively pushing bilateral and regional trade pacts in Asia. Its parliament recently ratified one such agreement with Singapore; a "South Asia Free Trade Area" (SAFTA) is also on the cards. The seven nations of South Asia - India, Nepal, Sri Lanka, Bangladesh, Mauritius, Pakistan and Afghanistan - barely do trade with one another. SAFTA is likely to change that.

India need look no further than some of its neighbors in Southeast Asia to see what vigorous structural reforms coupled with opening of their economies can accomplish: Korea and Taiwan have been able to increase their per capita GDP from less than 5 percent of the level of the U.S. in the 1960s to more than two-third of U.S. levels in one generation.

THE POLITICAL FACTOR

Although it's become fashionable to assert that economic growth in India will be mostly driven by an energetic private sector, the central issue today is that of good governance and how it will affect the country's economic prospects.

Those prospects would appear to be promising, on the surface at least. With a population of 1.1 billion people, including a growing middle class of 400 million mostly urban residents, India has become the world's fourth biggest consumer market - after the United States, the European Union, and China.

The annual economic growth rate is expected to be around 5 to 6 percent for the rest of this decade. This isn't a spectacular figure by any means, and India would need to accelerate the growth rate by at least 2 or 3 percentage points in order to meet the rising expectations of its mostly impoverished population, and certainly if it wants to achieve its ambition of becoming an economic superpower in two decades. At 6 percent annual growth, average incomes will double in 16 years, while at 8 percent it would take just 11 years. The impact of such a development on the living standards of everyday Indians would be profound.

For that to happen, leaders at the federal and state levels need to better demonstrate a capacity for good governance, and inject more transparency and accountability into the political system.

That means tackling biggest issue of all, corruption. The Indian polity is deeply infected with corruption. It starts at the top of the political pyramid, with federal and state cabinet officials widely reputed for demanding - through their proxies - payments for approving projects. Government bureaucrats have been known to make their own demands, particularly of industrialists who wish to expand their facilities or to start new factories.

The political parties - without exception - demand, and receive, funding for campaigns from India's dozen or so big industrial houses. Some of this money is laundered through foreign sources, particularly non-resident Indians in Europe, Canada and the U.S. Commissions of arms deals are also channeled into political-party coffers.

Even the Indian judiciary, supposedly independent, is gradually being tainted by credible accusations of corruptions. In poor states such as Uttar Pradesh and Bihar, it's not uncommon for court decisions to be bought. Intimidation - even murder - of judges is not unheard of.

While the liberal use of money to buy votes is scarcely the monopoly of India, the scale of campaign expenditures is staggering. In the 2004 parliamentary and state elections, for example, the equivalent of $2 billion in Indian rupees was reportedly spent by all parties.

Perhaps more than most other democracies, economic policy in India is influenced by political considerations.

That's because, at the federal level, the administration is run by a government that's a coalition of 14 parties. It's led by the Indian National Congress, whose president is Sonia Gandhi, the Italian-born widow of the late Prime Minister Rajiv Gandhi and the daughter-in-law of the late Prime Minister Indira Gandhi. Sonia Gandhi is determined that the Nehru-Gandhi dynasty should continue. (The founder of the political dynasty was Motilal Nehru, father of India's first prime minister, Jawaharlal Nehru, and Indira Gandhi's grandfather.)

Sonia's 35-year-old son, Rahul Gandhi - who was educated at Harvard and Cambridge Universities - has been designated as the heir-apparent. Like his mother, he sits in the Lok Sabha. He has been entrusted with regaining Uttar Pradesh state for the Congress Party from a quasi-socialist party that currently controls that state's legislature.

For all practical purposes, Sonia Gandhi is India's real ruler. Prime Minister Singh, an economist and technocrat, governs but doesn't rule. No Cabinet decisions are taken unless Sonia approves them. Dr. Singh is a mild-mannered man who takes his marching orders almost daily from Sonia Gandhi. Members of the 29-person cabinet often go directly to Sonia Gandhi for directions and directives.

Complicating the situation is the fact that, although the ruling coalition is led by the Congress Party, its survival depends on the support of the 70 or so Communists in Parliament. They constitute the biggest obstacle to further economic liberalization. For example, the Leftists have consistently opposed involvement of foreign investors in telecommunications, modernizing India's antiquated airports, and privatizing the moribund state-owned carriers, Air India and Indian Airlines. They have also opposed reforming labor laws - which means that the bloated bureaucracy - cannot be trimmed meaningfully. Nor can workers at government industrial behemoths such as loss-making steel plants, be laid off.

In other words, the Singh Administration cannot take bold measures to fully open up India's economy to foreign capital or even to dramatically eliminate the statist system of controls and inspections. It will take a majority government at the federal level for this to happen.

That is why many analysts predict that Sonia Gandhi will call for early elections in early 2006. Her efforts to revive the Congress Party at the long-neglected grassroots have intensified in recent months. Her purpose is clear: to ensure that in the next national elections, the Congress will emerge as the majority party.

If that happens, India can be expected to move more speedily along the path of economic reforms. It can be expected to be in a stronger position to persuade foreign investors to channel more money into manufacturing and infrastructure projects; many investors are sitting on the sidelines because of continuing uncertainties over the direction and implementation of market-oriented policies.

Meanwhile, several state governments where majority parties are in power - such as the industrial state of Maharashtra, where the Congress recently won handsomely in local elections - are conducting their own campaigns to win the confidence, and cash, of foreign investors. (A Maharashtra delegation, led by its chief minister, toured the U.S. in June.) States such as Andhra Pradesh, Tamil Nadu, even West Bengal (where a Marxist government has long been in power) frequently dispatch trade missions overseas, particularly to Europe, the U.S., and Southeast Asia. They have met with significant success. Cities like Hyderabad in Andhra Pradesh, and Bangalore in Karnataka, have emerged as formidable techno-hubs, with investments by global giants such as Microsoft.

Some of these investors, including Temasek of Singapore, have recognized the economic potential of India. Malaysian companies have won bids to develop roads and mini-dams in the resource-rich but economically backward eastern states of India. The Singh Administration wants to develop closer economic and political relations with the Association of South East Asian Nations (ASEAN), and with China and Japan, in the hope that pacts such as the Comprehensive Economic Cooperation Agreement with Singapore, and the Foreign Trade Agreement with Thailand, will generate not just more trade but also fetch substantial investments for strengthening India's languishing infrastructure.

Still, what continues to worry foreign investors is the cost of doing business in India. Translation: corruption needs to be factored into practically every business transaction.

That's where the question of good governance and transparency in policy-making comes into play. It's a scarcely encouraging signal to potential investors that practically every file on practically every economic project is run past Sonia Gandhi by the relevant minister. In this scenario, Prime Minister Singh seems almost a caricature, a courteous but cartoon-like figure who means well but who must take orders from a foreign-born naturalized citizen whose driving ambition is to gain political hegemony for her party and have her son become India's next prime minister.

That ambition may well provide India with the political stability it needs at the federal level in the long run. In the short run, however, it stymies prospects for faster economic growth because Sonia Gandhi's focus is almost entirely on the political calculus. And faster economic growth - through the mobilization of domestic and foreign funds - is what India needs now.

It would be comforting to think that, other than a handful of Western-educated officials such as Prime Minister Singh and Finance Minister Chidambaram, India's elected leaders - most of whom hail from rural areas because of the skewed demography - recognize this challenge. It would also be nice to think that India is developing a new generation of political leaders in a land where 75 percent of the population is below 35 years of age.

But the educated young don't want to go into politics; it's considered too dirty a game. It is, however, still the fastest way to make a quick rupee in India.

So where's the good governance going to come from?


ECONOMIC PRIORITIES

The fundamental objective of India's economic development needs to be poverty alleviation. The cohort of those living in extreme poverty is growing. That means some 400 million Indians earn less than the equivalent of US$2 a day, the largest such group in the world. The technology revolution and the development of energetic securities markets have not helped this cohort one bit. Manufacturing jobs are still concentrated in and around the major urban centers of Mumbai, Chennai, Delhi, Hyderabad, Bangalore, Kolkata, and Ahmedabad. That's partly because these cities offer educated workers who are willing to toil for relatively low wages. Even among the educated, there's an estimated 200 million population of unemployed. There is little coordination between federal and state governments on the question of poverty alleviation, let alone something as essential as a national job-creation scheme.

Infrastructure development is another priority. Vast areas of India's hinterland have no paved roads, fitful electricity, and little access to potable water. Little wonder that entrepreneurs are unwilling to set up production facilities away from the urban centers. India's national leaders have been only occasionally successful in persuading foreign investors to channels funds into infrastructure strengthening. There needs to be a stepped-up focus on wooing funds for hydroelectric projects, road-building, and telecommunications. The governor of India's central bank - the counterpart of Alan Greenspan, chairman of the Federal Reserve System - Y. V. Reddy told The Wall Street Journal recently: "If we are to continue to grow at 7 percent, then physical infrastructure in terms of availability and quality would be very critical. The investment in physical infrastructure is crucial, particularly in power and ports."

Still another priority needs to be irrigation and water supply. India still depends heavily on good monsoons to generate adequate agricultural yields. There is no national grid of irrigation canals that could feed areas whose soil is hospitable to year-round crops. Here again, unresolved disputes between states over the sharing of river waters need to be dealt with forthrightly by state and national leaders.

Primary education and health care are also critical. While India's much-publicized technical institutions - such as the seven Indian Institutes of Technology - turn out stellar graduates who then promptly head for lucrative overseas jobs, primary-school education in much of the country is sadly underfunded. There simply aren't enough teachers and schools in rural areas. Because education is a state responsibility, India's 35 states and territories need to have their local leaders pay more attention to the issue.

Deficit reduction needs to take place. More resources available for private-sector investment if the government's borrowing needs are brought down. The IMF says that private investment in India remains low by regional standards. Public investment is also low compared with much of Asia. Interest payments, wages and subsidies take up 50 percent of all federal government spending, leaving little room for much needed public investment and basic social services, according to the IMF. The IMF also says that lower fiscal deficits will improve financial intermediation. India's banks currently hold about one-third of their assets in the form of government securities, compared with 8 percent in Singapore and 15 percent in Thailand. "This has contributed to a banking system that, until recently, seemed largely disinterested in financing private sector activity," according to the IMF.



WHAT AMERICAN BUSINESS SHOULD EXPECT

Some months ago, the Confederation of Indian Industries (CII) asked its members to submit a "wish list." The following are items that figured most prominently in the responses from India's industrialists and corporate executives:

Reduction of corporate tax;
Cutting import duty on crude oil to boost the energy sector;
Reducing subsidies, particularly for cooking oil and kerosene;
Establishing a specific time-frame for taxes on goods and services;
Accelerated depreciation allowance for research and development (R&D);
Simpler procedures and tax concessions on mergers and acquisitions (M&A's);
Time-bound integration of all taxes such as octroi into value-added tax (VAT);
Dividends received from overseas companies should be exempt from taxation;
Widening the tax base on services;
Inverted duty structure should be streamlined;
Exporters should be refunded all the taxes paid by them. The IMF seized on this point by declaring recently: "While exports have been growing robustly in recent years, India still accounts for less than 1 percent of total global exports. Average trade tariffs in India are now at about 22 percent. There are plans to bring these down to ASEAN levels, around 8 percent on average, by 2009. The new budget [for 2005] makes a good start here. However, more dramatic action could have significant benefits. Quicker cuts in tariffs, combined with a lowering of non-tariff barriers and improvements in the business climate, would allow Indian business to achieve scale economies and to fully take part in international production chains. India's comfortable external position - with reserves increasing steadily in recent years - presents a perfect opportunity to speed this reform."
Greater attention and resources for life sciences and biotechnology;
Creation of a "Infrastructure Development Board" with public-private ties;
Removing disincentives in the telecom sector and establishing a single tax;
Linking the agriculture sector to world markets by infrastructure facilities such as transportation and cold-storage facilities;
Permitting foreign direct investment (FDI) in real estate and the IT hardware sector;
Downsizing of government bureaucracies on a priority basis;
Lowering high transaction costs to boost exports;
Encouraging public-private partnerships in defense production;
Enforcing an appropriate vehicle-retirement policy to reduce pollution;
More tax exemptions for small-scale industries, particularly those located in towns and rural areas.

If the Singh Administration - or its successor - is serious about clearing the bottlenecks in the economy, it would incorporate these suggestions.

In the meantime, here are specific sectors in which there appears to be fresh scope for American capital and entrepreneurships (given below in no particular order of importance):

Civil aviation: The federal minister of civil aviation, Praful Patel, is determined to privatize India's two national carriers, Air India and Indian Airlines. Mr. Patel, who made a fortune as a businessman in Maharashtra, is one of the most enthusiastic supporters of a free-enterprise economy. Private Indian carriers have lately been on a buying spree: they gave orders for 190 aircraft at the recent Paris Air Show, for a total of $16 billion. The largest single order was placed by a new airline, IndiGo, a subsidiary of a travel agency called InterGlobe Group. It committed to buying 100 Airbus A320's, for $6 billion. Several domestic private airlines are planning to expand their routes to Europe and the U.S. One airline, Kingfisher, which was launched last May, ordered five Airbus 380's, the largest passenger aircraft ever made. Indian airports, which are mostly dilapidated, are going to need rapid modernization and upgrading. Mr. Patel wants to build new airports to serve small towns and remote areas where tourism and industry could be developed.

Internet and telecommunications: The world's largest computer-chip manufacturer, Intel, is planning to spend more than $400 million on a chip assembly and testing facility in India. Intel already has a plant in Bangalore, India's Silicon Valley, where it designs software for power chips. Intel selected India over competing bids from China, Malaysia and Singapore. India's minister for communications, Dayanidhi Maran, has been lobbying American firms to establish a presence in India. He has convinced Flextronics - the world's leading contract electronics manufacturer - to widen its investment in India. Mr. Maran has also persuaded Flextronics's rival, Solectron Corporation, to come to India. He says he's also encouraged by the fact that Indian engineers and software specialists are increasingly returning home from California's Silicon Valley, where around 30,000 Indians still work. They are attracted by the growth in the IT industry. Also, visa restrictions following September 11, 2001, have resulted in an annual fall to 60,000 from 200,000 H-1 visas, under which professional workers are allowed to come to the U.S. for employment for a period of six years. This means that more Indian engineers must find jobs at home. The mobile-phone industry has experienced explosive growth. Nokia, the Finnish manufacturer of handsets, recently announced that it would spend $150 million to establish a production facility in the southern city of Chennai. India is adding some two million new subscribers a month, many of them in rural areas. As a result, cell phone-service providers are expected to get revenues of $7 billion in 2005. An international consortium - consisting of Indian and American companies, as well as the World Bank - is planning to establish thousands of rural Internet centers to bring government, banking and education services to isolated villages, according to the New York Times.

Power and energy: With increasing industrialization, India's energy needs have grown exponentially. Although India produces some oil and natural gas, the Paris-based International Energy Agency says that if current trends hold, India would need to import 90 percent of its crude-oil requirements by 2030. While there is scope for American companies to construct pipelines, there is concern in Washington over the proposed $4 billion, 1,700-mile pipeline that would bring natural gas from Iran to India via Pakistan. Because Iran is officially categorized as a terrorist state, Indian companies that participate in the Iran pipeline project face sanctions. Bush Administration officials say they are discussing alternate ways to meet India's energy needs. Among the projects under discussion are a pipeline from Turkmenistan to India, and building gas-fired power plants.
Defense: Because of its longstanding political friendship with the erstwhile Soviet Union and because Washington traditionally favored Pakistan in military sales, India traditionally bought arms and fighter planes from Moscow, or from France. But the American defense industry has long wanted to break into the Indian market; India has the world's biggest army after China and North Korea, and its air force and navy are also formidable. India is now scheduled to select a supplier for 126 new combat aircraft. That would involve orders worth $5 billion. (France is reported to have an edge in this deal.) Washington has made a rare offer to India under which there would be co-production of military hardware in India, including F-16 and F-18 fighter jets. But India has also decided to negotiate with Qatar to buy 12 used French-made Mirage jets. The Indian air force has agreed to buy 66 Hawk trainer fighter jets from Britain. The navy has agreed to buy the Russian aircraft carrier, the Admiral Gorshkov, for a nominal fee - although the carrier will require a $670 million refit and will eventually have between 18 to 20 MiG-29 fighters which will cost more than $1 billion. The Indian navy has also agreed to buy six submarines from France for $700 million. The army wants to standardize its artillery capability, and is currently in negotiations with South Africa, Israel and Sweden. The process will involve the purchase of between 1,200 to 1,500 howitzers; the purchase order is expected to be $3 billion. India also concluded an agreement recently with Israel to buy "Eye in the Sky" early warning system, the Phalcon.
Manufacturing and agro-industries: Industrial production accounts for less than 30 percent of India's GDP of $675 billion. This is low by Asian standards. And yet manufacturing is widely seen to be India's best bet for creating new jobs. But domestic entrepreneurs as well as foreign companies have been hesitant to invest in this sector on account of still formidable restrictions, a plethora of license requirements, and poor infrastructure. Vast areas of India's hinterland have no paved roads, fitful electricity, and little access to potable water. Little wonder that entrepreneurs are unwilling to set up production facilities away from the urban centers. Although agriculture generates the most revenues and India is now self-sufficient in food supplies - and indeed even exports rice and wheat - the country still depends heavily on good monsoons to generate adequate agricultural yields. In fact, a weak monsoon can reduce the annual economic growth rate by 2 to 3 percentile points. There is no national grid of irrigation canals that could feed areas whose soil is hospital to year-round crops. Here again, unresolved disputes between states over the sharing of river waters need to be dealt with forthrightly by state and national leaders.

Outsourcing: More than 300,000 jobs are created each year in India on account of outsourcing contracts from foreign companies. Among those who have outsourced some of their engineering design requirements to India are Airbus Industrie, Boeing, Caterpillar, Ford, Whirlpool, Snecma, General Motors, DaimlerChrysler, BMW, Mercedes Benz, Toyota, Honda, Nissan, Barclays, and John Deere. Practically all global reservations of British Airways and some other international carriers are routed through call-centers in India. In fact, more than half of Fortune 500 companies are using call centers in India. These companies are attracted to India by its large pool of English-speaking workers. The McKinsey Global Institute says that for every dollar that American companies invest off-shore, they save 58 cents. Although outsourcing has become a political issue in the U.S., with labor unions and some politicians decrying the export of jobs to countries like India, the trend toward taking advantage of India's call centers is likely to continue. India, however, is starting to get competition from Pakistan, Sri Lanka, and the Philippines.

Nuclear energy: India is hoping that the U.S. will export nuclear technology that would help it to build nuclear reactors to produce electricity. But the U.S. seems hesitant, mainly because India already possesses nuclear weapons (as does neighboring Pakistan), and it is concerned that American technology might somehow find its way through subterfuge to countries that Washington considers sponsors of terrorism but with whom India has cordial relations.

Tourism: India expects this sector to grow dramatically. It has embarked on an international advertising campaign, "Incredible India," through which it believes that the annual number of tourists would double to 12 million. But even though India has some of the best luxury hotels and resorts in the world - particularly ones run by the Oberoi and Taj groups - it needs more hotels that are affordable for young foreigners who may not have the funds to splurge. India wants more foreign investment in developing tourism, and its hotel and hospital industries.

Automobiles: With 1.1 million vehicles sold in 2004, India has become the fastest growing market in the world for automobiles, the third biggest in terms of sales in Asia, after China and Japan. But American manufacturers such as Ford and General Motors were slow to recognize the potential of the Indian market - unlike Japanese companies such as Nissan, Suzuki and Toyota. Korea's Hyundai, in fact, has grabbed a 17 percent share of the Indian auto market. Ford and GM each has only 3 percent. With rising incomes and a growing middle class that views cars as affordable, there appears to be plenty of scope for American auto makers to do well in India.

Biotechnology: The biotechnology sector's revenues in 2004 were $1.1 billion, representing a growth of 37 percent from the previous year. Science Minister Kapil Sibal told a conference in Philadelphia recently that India will expand its biotechnology sector five-fold by 2010. Citing lower costs and a skilled scientific work force, he urged greater American investment in the sector. Ten biotech parks are being created by the government's Department of Biotechnology, and entrepreneurs will be offered incentives such as tax holidays and infrastructure support.

Legal services: The Indian Advocates Act of 1961 prohibits foreign law firms from opening offices in India. But there are indications now that the situation may change. India is in negotiations with Britain about liberalizing the legal market. Young Indian lawyers point to the fact that as the economy opens up to foreign investment, and Indian companies invest abroad as well, the need for international legal services will increase. The presence of foreign law firms would stimulate competition in what is an outmoded legal industry where fees are escalating without the quality of services improving.

Liquor and beer: Mohandas Karamchand Gandhi - the Mahatma - who was among the founders of independent India and an apostle of non-violence, strongly believed in the virtue of being abstemious. As a result, Indian states imposed prohibition for more than four decades; this benefited bootleg and moonshine businesses. Illegal alcohol consumption also exacerbated social ills such as domestic violence and disruption in families, particularly in rural regions. The authorities then belatedly discovered that there was revenue to be had through taxation of legitimate liquor and beer sales. They also discovered that the market - particularly for beer - was huge. But because alcohol is taxed at the rate of 50 percent of the retail price, consumption is relatively low. Foreign beer producers such as SAB Miller - the London-based brewer that has secured 35 percent of the Indian market - say that even though beer consumption is growing at 7 percent annually, there's potential for the market to grow to 40 times its current size. There is also great scope for expansion of retail outlets: India averages just 1 outlet for every 27,000 people, compared with 1 for every 195 people in China.

Technology: IBM recently announced that it would create 14,000 new jobs in India, thereby raising its work force there to 38,000. The announcement came shortly after the Armonk, N.Y.-based giant said that it would lay off 13,000 American workers in a cost-cutting move. IBM says that the addition to its payroll in India comes on account of more business there, and also because highly skilled technology workers are available at lower wages that in the U.S. For example, a typical engineer or software programmer would earn $75,000 in America; in India, the local salary for a similarly qualified worker would be the equivalent of $15,000.

Pharmaceuticals: This sector is flourishing, especially since Indian companies produce generic drugs that are exported for far less than from the West. Last year, Indian companies registered 200 patents, a record.

Media: After long years of prohibiting foreign publications from printing in India, the Indian government recently relaxed regulations. Daily newspapers published abroad are now allowed to reproduce facsimile editions in India; they are still now permitted to bring out editions with Indian content specially produced for the Indian market. The International Herald Tribune has already started printing editions in Hyderabad; the Financial Times and The Wall Street Journal are expected to follow suit. Foreign companies can only own equity up to 26 percent in Indian media properties. Unlike most countries, India is experiencing a boom in newspapers, particularly in the English language. There is also a boom in television, with new entertainment and news channels being launched practically every week. There appears to be enough advertising to feed these channels.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist


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