Connecting the Dots in India’s Business Portrait

The notes and observations below about India’s business climate are cross-posted at the website of Geoskope (, an intelligence company focused on key emerging markets, where I serve as Chief Knowledge Officer.

The following media items caught my attention this week, since they underscore two of Geoskope’s core messages about India: 1.) The country is a exasperating place to do business but also a potentially rewarding one if you are prepared to put in the effort; and 2.) There’s no substitute for getting out and seeing what is happening on the ground in India.

The first truth was expressed in an article in the New Delhi-based Business Standard about the lessons expatriate managers have garnered from their time in India.  It quoted the president of Panasonic India as saying, “One of the things that I have learnt while working in India is the virtue of being patient and having a sense of humility.”  An executive at the Indian subsidiary of Altran, the French technology consulting company, added that though the challenges are bigger than in Europe so are the opportunities: “You always have this feeling that everything is possible.”

Toronto’s Globe and Mail carried a good overview of the export opportunities for Canadian businesses in India.  Among other things, it stressed that patience and persistence were needed in order to capitalize on them.  It quoted the CEO of a Canadian software provider as saying that success requires a long-term commitment and that “Companies have to think in terms of years, not quarters.”

Part of the reason for this, according to Export Development Canada’s chief representative in India, is that the country has a “family-oriented” culture which places high value on personal relationships.  As a result, foreign companies have to spend time in the country to show local players they’re serious, all the more so now that India has once again become an emerging market darling.  The representative emphasized that “This is a hot market and Indian companies have lots of choice.  They are not going to answer your emails.  They are going to want to meet with you three or four times through the year.”

Reinforcing this last point, the Business Standard has a good article about the continuing prominence of family-run companies in India.


New Delhi’s municipal government reports that per capita income in India’s capital rose 13.5 percent in the April 2014 – March 2015 period and that income levels there are three times higher than the national level.  Economic data issued by Indian government agencies are a bit suspect these days.  But the figures about New Delhi jibe with new projections by Oxford Economics.  According to the consultancy, Delhi will be the fastest-growing urban economy in Asia over the next five years and that overall five Indian cities will occupy places in the top six of the rankings.  All the more reason to focus on the Indian marketplace despite its many challenges.


The importance of regional differentiation is another core Geoskope theme when it comes to the vast and variegated Indian marketplace.  Hindustan Unilever, the country’s largest fast-moving consumer goods company, has underscored this point by adopting a new strategy aimed at “serving many Indias.”  The approach segments the domestic market into 14 consumer clusters.

On a related note, McKinsey last year issued a good report on “Understanding India’s Economic Geography.”


Speaking of the sensitivity to on-the-ground conditions in IndiaA Financial Times article about how transplanted Western business models have not fared well in the Indian ecommerce sector quoted Shailendra Singh, India managing director for US-based venture group Sequoia, as saying:

In India, clone businesses tend not to work well. What India needs are mutants, meaning businesses with the same underlying DNA as those that have worked elsewhere but which come with extra powers and abilities, or entirely new species suited to local conditions.


Acquiring land in an efficient manner and at a reasonable cost has long been a huge challenge for many foreign companies with India ambitions, as IKEA’s on-going experience demonstrates.  A Forbes article on the problems dogging the Swedish retailer’s big plans for the Indian market quotes an executive: “Buying land has proved to be more difficult than we initially predicted…” The company has been forced to bring on more people in order to focus on complex real estate issues.  As things stand, IKEA believes it will take another two years before it can open its first store in the country.

Reform of the land acquisition process is key to Prime Minister Narendra Modi’s grand plans to resolve India’s vast infrastructure challenges and make the country into a global manufacturing powerhouse.  But his land reform legislation has stalled in parliament and in a recent media interview he seemed to signal he was done expending political capital on the issue: “This is not a matter of life or death for me. And neither was it the agenda of my party or the government. The initiative was in response to a demand from the states, and being a federal structure it was my duty to respond.”


Another bane to Modi’s “Make in India” manufacturing initiative is New Delhi’s infamous red tape.  For years, surveys of business people rated India as having the worst bureaucracy in Asia and the World Bank’s Ease of Doing Business index ranked India this year at 142 out of 189 countries.  (For a more amusing perspective, see here.)  Modi has taken some steps to improve things and says he wants to do more.  But then the Indian commerce minister reports that 25 government ministries have their hands in “Make in India” policymaking.  Good luck with that.


Speaking of choking red tape….

India is in a start-up frenzy.  Innovation guru Vivek Wadhwa wrote recently that “India is about to experience an entrepreneurship boom that will make America’s dot-com boom seem lame.”  And Indrajit Gupta, founding editor of Forbes India and a good friend of Geoskope, writes about the remarkable growth of entrepreneurship among India’s young people.

But here’s the bad news: Indian tech startup are moving overseas, mainly to Singapore and the United States, due to concerns about domestic regulatory burdens.  The Hindu newspaper quotes a Facebook executive as saying that the $22 billion acquisition of WhatsApp, the instant messaging firm, in the US was easier to do than last year’s $10 million purchase of an Indian software startup.  The executive explained that “the red tape and ambiguity in Indian rules and taxes were overbearing.”

The Indian government is moving to ease these encumbrances, but according to the Wall Street Journal “Indian startups might still prefer listing in the U.S. as investors there seem to appreciate the growth prospects of online businesses and are less concerned about present profitability.”  And even with the regulatory changes, Singapore-based firms like Flipkart, which is one of India’s hottest e-commerce companies, might not find it worth their trouble to engage domestic capital markets.


Still, the Modi government must be getting some things rightFDI inflows into India jumped 22 percent in 2014, for a total of $34 billion, even as global FDI flows fell 16 percent.  The increase meant that India placed ninth among FDI-attracting countries last year, as opposed to 15th in 2013.  The United Nations Conference on Trade and Development, which compiled the data, believes that “FDI inflows are likely to maintain an upward trend in 2015” in the country.

Bloomberg also reports that 350 private equity transactions, worth $12.69 billion, have taken place in India so far this year, as opposed to 315 deals amounting to $10.39 billion in all of 2014.

And India comes out on top of this year’s Baseline Profitability Index, which measures the relative attractiveness of 110 countries and territories when it comes to foreign investment.  The index’s compiler attributes the result to a combination of favorable growth forecasts, perceptions of decreased government corruption and better investment protections following Mr. Modi’s election as prime minister.

Finally, according to a JP Morgan survey, India is the most attractive of the BRIC markets for North American investment professionals.  A bank executive adds that “The prospects of long-term economic growth, favorable demographics, BJP’s reform agenda, numerous investment opportunities and a democratic legal system have been cited as the most attractive factors for investing in India.”
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India is Shackled by its Neighborhood

Self-inflicted wounds – whether in the form of poor domestic governance, decrepit infrastructure, a hostile business climate, and the absence of a unified national market – continue to hobble India’s ambitions in Asia and on the larger world stage.  Prime Minister Narendra Modi’s forthcoming budget offers a good chance to make some progress here.  But New Delhi is also held back by its tumultuous neighborhood and, as recent events demonstrate, the prospects for headway on this front are far less promising.  This, in turn, creates a striking paradox: India yearns for a place in the first ranks of world power – Mr. Modi proclaims that he wants “to make the 21st century India’s century” – and yet it remains unable to purposefully shape events in its immediate environs. Continue reading

Repentant “Tax Terrorists” and Other Signs of Change in New Delhi

From senior government officials working longer hours and cutting back on their golf game, to the emphasis on Hindi in official documents, there are plenty of signs that a new order is descending on Delhi.  But perhaps the most poignant so far is the way Pranab K. Mukherjee, currently the president of India, has been forced into a public renunciation of the very tax policies he pursued just two years ago when he was finance minister.

The most significant consequence of the horrific November 2008 terrorist assault in Mumbai was actually self-inflicted.  The talented Palaniappan Chidambaram was shifted out of the finance ministry in order to whip the feckless home ministry into shape.  Mukherjee was appointed to fill the resulting vacancy, reprising an entirely unmemorable stint as finance minister in the early 1980s.  Significantly, while Chidambaram was an enthusiastic champion of the key economic reforms of the early 1990s when he was serving as commerce minister, Mukherjee was virtually invisible despite then heading up the Planning Commission, a key economic planning agency.

His second stint at the finance ministry, from early 2009 to mid-2012, was nothing short of disastrous.  He remained complacent as the global economic meltdown started to weigh in on India, preferring to emphasize expensive social welfare projects instead of productivity-enhancing structural reforms.  The budget he formulated in early 2011 was bereft of any serious commitment to rein in profligate spending and was laced with roseate assumptions that were quickly proved unfounded.  And the following year’s budget was so out of touch that a distinguished observer noted it was “shocking that a finance minister can ignore all the problems that he faces.”

Mukherjee’s tenure ended when he was kicked upstairs to the Indian presidency, the largely ceremonial head-of-state post.  By then India, hailed as the next China just a few years earlier, was being called the “first BRIC fallen angel,” the “Greece of Asia” and a “gasping elephant.”  The global ratings agency Standard & Poors was threatening to downgrade the country’s sovereign debt credit rating.  The announcement that economic growth in the first quarter of 2012 had declined to 5.3 percent, from over 8 percent just over a year earlier was so shocking that headlines in the Economic Times screamed “Goodbye 2020, Hello 1991!”  A Congress Party leader was even quoted as saying that “We have to rescue the economy from the ravages of Pranab Mukherjee.”

Most damagingly was the wrecking ball Mukherjee took to India’s reputation among global investors.  Searching for ways to pay for costly social spending, he devised exasperating tax policies directed at foreign companies doing business in India – this at the very moment when India should have been pulling out the stops to attract more overseas investment.  The most egregious case in point concerns Vodafone, the London-based telecommunications company, which in 2007 spent $11 billion to buy from a Hong Kong conglomerate majority ownership of what is now the second-largest telecommunications company in India.

Vodafone was subsequently hit with a $2.2 billion tax bill on its purchase.  The company resisted, arguing that the transaction was executed by offshore vehicles of the two principals and that in any case Vodafone was not the seller of the assets and so could not possibly be liable for a capital-gains tax.   After an extensive legal battle, the Indian supreme court in early 2012 agreed and reproached the government for overreaching its authority.

Having thus failed to prevail in the courts, Mukherjee attempted to re-write the law by proposing a retroactive tax on capital gains arising from cross-border purchases of Indian assets dating back 50 years, a piece of legislation that only furthered India’s reputation as an inhospitable investment destination.  According to Sanjaya Baru’s new book, Mukherjee gave Prime Minister Singh just one day’s notice that he was going to introduce the legislation.  The proposal provoked seven business associations from the US, the UK, Canada, Japan and Hong Kong to write a joint letter to Singh, warning that it “has called into question the very rule of law.”

The concept of retroactive taxation also drew criticism from the BJP, which labeled it “tax terrorism” in its recent election manifesto.   In its first official policy statement, Prime Minister Narendra Modi’s new government pledged to re-work the current tax regime so that it’s “non-adversarial and conducive to investment, enterprise and growth.”  It also promised to “create a policy environment which is predictable, transparent and fair.”

The irony is that this repudiation of the way Mukherjee approached things while at the finance ministry was issued not by Modi but by Mukherjee, who was discharging the traditional duty of the Indian president in outlining a new government’s agenda to a joint session of Parliament.  It’s an irony that many commentators overlooked, though it has much more import for the country’s prospects than the numerous stories in the press these days about miffed ministers and inconvenienced babus.

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