This article was written by Akshay Naran. Akshay leads the Australia India Business Group at King & Wood Mallesons and is also the Honorary Secretary and a Management Committee Member of the Queensland Chapter of the Australia India Business Council.
India is a land of contrasts. While India’s economy rapidly grows, last month’s train derailment which killed 146 people highlights that the country’s infrastructure is still outdated, poorly maintained and unsafe in many respects. India’s infrastructure needs investment and it needs to be modernised. This of course creates opportunities for Australian companies with significant expertise in building and maintaining safe and reliable infrastructure to partner with India to diversify and expand their global presence.
Unfortunately, the momentum behind the proposed Comprehensive Economic Cooperation Agreement (CECA) between Australia and India has slowed, with little progress made since the most recent round of official negotiations in September 2015.
With the future of the Trans-Pacific Partnership becoming increasingly uncertain, following statements from President-elect Trump that the US will pull out of the agreement, hopefully more of the Australian Government’s focus will now shift back towards finalising the CECA. The challenge is that both sides are currently involved in negotiating the Regional Comprehensive Economic Partnership and so we would not be surprised if the CECA is once again sidelined until that agreement is concluded.
Despite the slowdown in negotiations of the CECA, 2016 has seen a number of Australian companies invest significant capital into the Indian market. For example, in October, Flight Centre Travel Group diversified its India business by acquiring the business assets of a leading local travel group with interests in foreign exchange, leisure, corporate and wholesale travel. An analysis of India’s demographics shows that this acquisition makes sense, particularly as over 65% of India’s population is below the age of 35 and the emerging middle class has rising levels of disposable income and growing aspirations to travel.
Similarly, as the trend of urbanisation in India continues, in October, ASX listed CIMIC announced that its subsidiary Leighton India Contractors has entered into an alliance agreement to deliver a two hectare residential development project in Mumbai.
The increasing trend of companies looking to India is not just limited to Australian companies. Large global players have also been expanding their presence in India in innovative ways. These companies have recognised that investing in India requires a long-term outlook and have understood that the ways of doing business in their home country will not necessarily work in India.
Take Amazon for example, who has committed billions of dollars in investment to build a strong logistics network that works in India. To be successful in India, Amazon realised that it needed to adapt its business model, particularly as internet penetration and access to technology is a challenge.
As India is largely a cash economy, one innovation was to permit customers to pay cash on the delivery of a product. Amazon also introduced a selling program whereby mobile carts travelled over 15,000 km across 31 cities and engaged with over 10,000 sellers of products to teach them the benefits of selling products online. Amazon also introduced a ‘studio on wheels’ that travelled with the mobile carts and helped small business owners register with Amazon as sellers.
Recent reports suggest that foreign direct investment in India has increased by as much as 60% since September 2014. These investments come off the back of several important reforms by the Modi Government this year. In contrast to many other areas of the world where protectionism is on the rise, the Indian Government has been focused on attracting foreign investment, encouraging foreign companies to manufacture in India and improving the ease of doing business. This has culminated in important reforms such as the passing of the GST Act and the new Insolvency and Bankruptcy Code, both of which are expected to improve the perception of India as a destination for foreign investment.
Modi’s latest major reform, the demonetisation of Rs 500 and Rs 1000 currency notes (which constitutes over 86% of the total value of currency in circulation) will be a painful short-term adjustment for the economy, but the Indian Government expects that the benefits of the measures will be seen in the long-term.
The Indian Government expects that demonetisation will:
- reduce corruption, the circulation of counterfeit notes and black money;
- increase the levels of customer deposits in the banking system, which may in turn, enable the banks to finance more projects, particularly in the infrastructure space; and
- force people to declare unaccounted income, which will then increase the tax collections of the Indian Government.
It remains to be seen whether these expectations will be met, but one thing is for sure, foreign investors will be closely following these events.
As the business environment in India continues to improve and become more conducive to foreign investment and as business conditions in Australia continue to be tough, we expect that Australian companies will continue to look at innovative opportunities to grow and diversify their operations into India.
Australian companies considering investing into India need to strategically consider the political and economic climate in the country as well as the specific business climates in the individual states and cities which they will target as the appropriate entry point for their business. Rather than a homogenous whole, each state and union territory in India should together be treated as a cluster of countries (much like Europe) where each ‘country’ is growing at different rates and is different in culture, language, and expectations.
The companies that will be successful in India will be those that invest significant time in understanding the broader Indian culture (as well as the culture of the particular region) and are willing and prepared to adapt and tailor their business model to suit the business climate in India. The opportunities are immense, but Australian companies will need to be patient and take a long-term approach to any investment in India.