Investing in manufacturing in India
A leading consultant analyses the factors that have made investing in India easier and a more rewarding experience as long as investors go in with a level of preparedness.
The International Monetary Fund (IMF) has recently altered its predicted growth rate for India slightly downward to 6.8 per cent, but this is still attractive compared to the sluggish rates of growth elsewhere in the world. Foreign investors’ confidence in India has also recently improved, making it the eighth most attractive destination for foreign direct investment (FDI). Meanwhile India’s ranking in the World Bank’s league table for ‘ease of doing business’ is rising, albeit at 130 the improvement isn’t over yet!
These changes have been strongly influenced by the government’s attempts to make India a more attractive market by, for example, implementing demonetisation in November 2016, increasing online transactions and the planned introduction of a common nationwide Goods and Services Tax (GST) in July.
All this has resulted in an improvement in business confidence and there are plenty of other reasons why foreign companies should invest in India:
- A strong prime minister in Mr Modi and increasing political stability
- A mature banking system and vibrant capital market
- Aspiring consumer base that outstrips that in most other nations
- A large and youthful, English-speaking workforce
- Central time zone between Europe, Middle and Far East
- A low-cost base compared to most other nations
- Commitment towards global environmental initiatives and intellectual property rights
…but keep your eyes open
India is on a journey of economic liberation and is working hard to attract foreign companies. However, it can be a difficult place to do business and, whilst things are improving, it’s wise to be prepared before entering the market.
India has a rich cultural tapestry developed through centuries of history, which captivates many visitors. But this same history and culture, coupled with a democratic constitution, has resulted in a diverse and complicated corporate landscape which needs careful navigation. This can be daunting and opaque to outsiders. Therefore, before you start business here, it is critical to have local knowledge on your team; people who have established relationships and business networks. Such networks are built over generations and are culturally complex, therefore usually unfathomable, and inaccessible to foreigners.
The procedures related to starting a business venture are cumbersome, time consuming and can be expensive. India’s public sector administration is bureaucratic and requires absolute perfection in all paperwork otherwise rejection will result. This is where local knowledge is essential; as well as a large measure of patience.
There is little integration or collaboration between various statutory departments and so multiple permitting requirements are normal. For example, construction typically requires permits from at least eight different departments. And each one of these touchpoints may be less than transparent which, for an ethical international company, can introduce considerable hurdles to overcome and delays.
There is a dazzling array of opportunities in India, particularly in publicly funded infrastructure and it is very tempting – and relatively easy – to grow a business quickly in terms of revenue. But be aware that India ranks as one of the worst countries in the world for the ability to enforce a contract, taking an average of 1,420 days with a time consuming judicial process. So, don’t expect variations to be agreed quickly or for payment any time soon.
Opportunities in industry
India’s industry sector is a major contributor to the economy. Burgeoning domestic manufacturing and consumer markets have created substantial demand. India’s producers are also enjoying export success.
Industry accounts for 16 per cent of GDP but under its ‘Make in India’ campaign, the government aims to increase industry’s share of the economy to 25 per cent by 2025; creating 100 million jobs. The government has recently offered tax breaks and abolished the Foreign Investment Promotion Board (FIPB) to make growth easier.
India’s competitive edge is owed in part to the facilities used to create the products that Indians and the rest of the world so demand. Those factories, processing plants, warehouses and logistics centres often define ‘state of the art’ and are created with the support of expert planning, design and delivery teams. With the costs of manufacturing increasing in China, most growth is expected from engineering and capital goods, chemical, pharma, food and textiles. Foreign investment is generally sought in high value-added industries and those with strong growth prospects; defence equipment, power generation, railways and metros, biotech industries, automobile and auto component, and speciality chemicals.
Site selection is critical to success. In addition to providing investment advice, technical assistance, design and project and programme management for industrial projects, Mott MacDonald has developed sophisticated modelling tools to aid decision-making.
Selection factors include:
- Engaging, communicating with and consulting stakeholders – failing to do so risks objections to proposed developments. Planning disputes can themselves be costly, but the real harm to industry clients stems from delayed production, with resultant loss of revenue and, potentially of market share
- Ease of access to transport, for the cost-effective import of raw materials and labour, and the export of finished product
- Resilient power and sustainable water supplies
- Access to suitably educated and skilled employees
- A suitable site – greenfield and brownfield both have pros and cons; but it must be free risk of flooding, landslide, or other natural hazards
- Clear and unambiguous land titles (ownership)
- Environmental clearance
Once a facility is operational, proactive management of environmental performance is important. Compliance with regulatory requirements is good. Going beyond them is even better, as it helps manufacturers to stay on the right side of the law and helps win the trust and respect of local stakeholders and customers alike.
Tips for success
Mott MacDonald has been prominent in India’s industry sector for about 50 years. Whether working with clients from project inception right through to operation, or appointed to assist with one specialist aspect of a project, our experts seek to add advantage that will enable clients to get ahead, and stay there.
My advice is: do your homework so that you have confidence in your market; employ locals who understand the landscape; plan for all the public-sector touch points – go in eyes-wide-open – and be certain that you can access everything that your business will need.
India can be a rewarding place to do business!
Liz King is Managing Director, Mott MacDonald India – a leading management, engineering and development consultancy.