As They Shoot Themselves in The Foot
If you’re an entity that’s thinking about making a foreign direct investment in India, either as a capital investment or a commercial venture, the country is certainly not providing compelling reasons for doing so. However, as they say,“ …let’s get past these so we can move forward.”
For starters, economic growth in India has dropped to its lowest level in nine years, down to 5.3 percent GDP for Q1, 2012, from its blistering rates of 9 to 10 percent during its prized inclusion as one of the “BRIC” countries along with Brazil, Russia and China, all of which are now in some mode of slowdown. Further, as of this writing, Standard & Poor\’s said that India could become the first of the so-called BRIC economies to lose its investment-grade status, already at BBB-, the lowest possible investment grade rating.
However, the economy and its investment grade notwithstanding, India seems intent on shooting itself in the foot politically, particularly as it relates to attracting foreign investors, as well as the bureaucratic stifling of its own marketplace, thus threatening to exacerbate its decline.
India ranks a pitiful 132nd in the World Bank’s “Ease of Doing Business” countries, between Nigeria and the Palestinian Territories, due to its sea of red tape and sclerotic bureaucracy. The country recently rescinded a 2011 government ruling that would have allowed multi-brand retailers, such as Walmart, to own 51 percent of their business in India; and single brands, such as Nike, 100 percent ownership. It has reverted back to the necessity for U.S. multi-brand stores to only establish wholesale joint ventures, and single brands back to owning only 51 percent. Prime Minister Singh protested the ruling essentially to protect India’s small shopkeepers, forever its primary retail model.
Further, India has imposed new taxes on foreign businesses, even retroactively on past deals. Talk about a reason to have second thoughts on entering or leaving India. In fact, the outflow of capital, partly attributed to this move, is considered one of the reasons for the rupee’s 13 percent fall since the beginning of the year.
And, just to add another significant “not to go” reason: according to the annual Corruption Perceptions Index, published by Transparency International, India gets a score of 3.1 (any score under 5 is considered significantly corrupt). However other emerging country peers are similar: China at 3.6; Brazil at 3.8 and Russia at 2.4. Perhaps the most onerous of corrupt practices is bribery to members of the judiciary, police, registry and permit services, and officials in connection with buying, selling or renting land. To top it off, there is almost a total lack of punishment for offenders.
Given these examples of barriers to entry, one could say that India as the world’s largest democracy is both good news and bad. The good news is obvious over the long term. The bad news is that, unlike China where the state can dictate initiatives that may override the interests of its people for the longer term interests of the state, India must govern according to the will of its constituents. And this is further complicated in India as politics are skewed along regional lines (28 states) with widely different perspectives on how business should be conducted in their areas, according to Ron Somers, President of the U.S. – India Business Council (USIBC). Accordingly, he cited six states with Chief Ministers who are enthusiastic about foreign investment: Gujarat; Maharashtra; Tamil Nadu; Kamataka; Andhra Pradesh and, now Uttar Pradesh.
In addition to its political and economic speed bumps, India’s infrastructure continues to be totally “unfriendly” to the efficient and effective distribution of goods and services.
There are other “foot shooting” political and economic impediments and barriers to entry, but the above are sufficient to cause foreign investors to pause.
So Why Even Think About Entering India?
Having stated some of the reasons “not to go” to India, a very logical and prudent plan may be to advise yourself and colleagues to wait until India gets its act together and lays out a much larger welcome mat. However, I would advise that even though we’re in the middle of global economic turmoil, with India exacerbating its own slowdown with the issues cited above, that now, in fact, is the time not to simply start thinking about entering India, rather one should be proactively planning for entry. And, there are many reasons why one should be doing so.
Let Me Count the “Why’s”
Why now? While the fact that India is lagging China’s meteoric growth accomplishments by about 7 to 10 years could be viewed negatively as a sign of continuing inertia, it could equally be viewed as a signal that now is the time to enter, just before takeoff so to speak. At this moment in time, one might compare India’s economy to that of post-WWII United States, poised on the edge of unprecedented growth. And, for those of you old enough to remember that period between 1950 and 1980, (if not, you should heed what I’m about to say), it was the most explosive era of growth in the history of this planet. And, it was further accelerated on the steroids of marketing, the “golden age of advertising,” and enormous demand creation.
To this point, Darshan Mehta, President and CEO of Reliance Brands, and contributor to this issue, (see accompanying Q&A), pointed out that unlike most developed economies, in India a business does not have to create demand. It already exists. He said, “I think the largest challenge is what I call the mindset challenge. Most, if not all of the marketers from the western world, are tuned to focusing their arsenal on creating the consumer or creating demand. In India, consumers exist; what you need to do is find a way of reaching them. The biggest challenges are the distribution channels.”
The macro-backdrop for this growth is India’s GDP. Currently at about $1.4 trillion, and even though its growth has slowed recently, by various estimates it’s expected to reach about $2 trillion in 2015 and upwards of about $3.5 trillion by 2020. Along with this growth, annual disposable income doubled between 2006 and 2011, (see chart 1), and is expected to continue on its proportionate trajectory, essentially projected to nearly double again between 2011 and 2018. Through this macro-economic prism, just as there have been successful “first mover” U.S brands and retailers into China over the past decade, now is the time to move into India. In fact, there are other consumer, cultural, economic and legal characteristics that would indicate that India has the potential to outgrow China in share of market. Furthermore, as is so often the case in the U.S., economics will eventually trump politics in India. As they say: “follow the money.” And, in the case of a capitalistic democracy such as India and the U.S., the search will lead you to the power. So, just as our large corporations and financial institutions wield enormous influence over the lawmakers and regulators in Washington, their counterparts in India (such as Tata Group, the Reliance Corporation and many others), whose interests are growth and profit-making, know that over time India must open its doors more widely to foreign direct investment, as well as elevate its hugely impoverished citizenry to establish a more consumption driven economy. Therefore, it’s logical to assume that India’s barriers to entry for capital and commerce will come down. The question, of course, is when.
As Ron Somers was quoted regarding the potential “distraction” from mutual investment and trade during the election cycle in both countries, “That’s when business must lead the way.” Two-way trade between the countries according to the USIBC, was $25 billion five years ago, is currently at $100 billion, and they anticipate it reaching $500 billion by 2020.
The other good news part of India’s democracy is that it abides by the rule of law. Thus, foreign entities are provided a degree of protection against counterfeiting and other fraudulent activities so prevalent in other
countries, including China.
India is also the world’s largest English speaking population. According to Mehta, India’s “national language is English.” He went on to say, “I lived in Bangalore for eight years, the so-called local language was Kanadda, but the national language on paper was Hindi. But if I didn’t speak English, I couldn’t live in that city. If I spoke only Hindi, I couldn’t catch a cab. The commercial language – every single application to the government of India – for a visa, to do commerce, to send money, foreign investment, is in one language, English.”
The Kids Have It
The very real and growing treasure in India is its youth. Of its 1.2 billion citizens, 54 percent are under the age of 25. While most of the developed world has reached maturity (both commercially and demographically), India’s youth engine, with increasing disposable income, is poised to drive massive consumption growth as well as in different categories of goods and services.
According to Mehta, while about only 30 percent of India’s population resides in cities (of which there are about 59 with at least one million people and another 400 with about half a million), he expects the migration from the rural areas into the cities to continue. And the largest percentage of these new city dwellers will be in their twenties. So, while the number one expenditure among consumers today, is for food, second for housing, next for transportation, and with apparel coming up fourth, according to Mehta, these young consumers are likely to re-prioritize consumption favoring fashion, footwear, beauty products, entertainment and leisure.
A last point about India’s young and growing consumer segment, is that it could well be the factor that allows India to “leapfrog” ahead of China in the next decade. China, having imposed its so-called “one-child rule” per family has aged their population, which will therefore serve to decelerate future growth.
Apparel Retailing on the Youth Rocket
Speaking of the “kids having it” (their growing disposable income), they also are “wanting it,” namely those things young people around the world want. So, the fashion and apparel retailing sector promises to be a leading industry in India’s drive towards modernization.
Already at around $70 billion, according to Euromonitor International, consumer expenditures apparel and footwear sales are projected to reach over $216 billion by 2020, (see chart 2). Also note how India surpasses China and worldwide percentage of total expenditures on apparel and footwear to 9.2 percent by 2020. Chart three projects apparel sales only through 2016, with a breakdown by category. Note the higher growth rates for the women’s and children’s categories.
In addition to the driving engine of the young, their disposable income and highly-urban location, they will be taking on more sophisticated lifestyles, more socializing opportunities and along with it, the need to present a more fashionable and modern appearance. Thus, the hunt for the coolest fashion looks and brands will be a top priority for this group.
While apparel has traditionally been larger in the men’s category (with only 20 percent of India’s urban women in the workforce), women’s apparel is poised for take-off on that youth rocket as well, and will eventually win top share as it has in all developed countries.
Of course, more American brands and giant retailers such as Walmart and others would be attracted to India if its government would re-instate the ruling that allows 51 percent ownership by the multi-brand retailers and 100 percent by the mono-brands such as Nike, Gap, etc. As stated above, I believe this will happen. It’s just a matter of time.
As stated earlier, Mehta’s point that retailers, unlike in the developed countries, do not have to create demand. It exists, big-time. The challenge is in getting to it, (distribution). Further, it would suggest that brand building should not be on the top of the priority strategy list, (Indian shoppers are likely already familiar with American brands anyway).
Furthermore, according to Mehta, those “power” brands and retailers who enter the Indian marketplace, “they must rethink their strategies for reaching the consumer, rather than just duplicate what they did in
the U.S. and hoping it works. Look at the car market. The most successful marketers in India have not been the Germans, not the Americans, but the Koreans and Japanese. They first understood the consumer, then worked backward.”
“Action Expresses Priorities.” Mahatma Gandhi
In closing, it’s appropriate during this period of global political and economic turmoil to quote India’s former great leader. If India’s recent “actions express its priorities,” one could be of the opinion that they are deleterious to the growth of its economy, the elevation of its people and its progress towards becoming a modern-day leader among developed countries.
However, while the government may be acting on priorities they believe are in the best interests of India, I am of the opinion that they are counter-intuitive to the longer term priorities of its people and its business communities.
So, back to the good news and one of the biggest “why’s” for entering India: it is the world’s biggest democracy, and therefore the will of its people, its business communities and their priorities will ultimately prevail.
If you were thinking twice about entering India, think a third time, and just do it. However, do it with an Indian “partner” entity that can assist in traversing all of the current “why nots,” as well as where and how to connect with Indian consumers who can’t wait to buy your brand.