April 17, 2015

Why India’s Economic Growth Matters

Indian Prime Minister Narendra Modi attends a meeting of office bearers of his ruling Bharatiya Janata Party (BJP) ahead of their National Executive meeting in Bangalore, India, Thursday, April 2, 2015.
Indian Prime Minister Narendra Modi attends a meeting of office bearers of his ruling Bharatiya Janata Party (BJP) ahead of their National Executive meeting in Bangalore, India, Thursday, April 2, 2015.

Getting into the Indian market is difficult, but not impossible.

According to the IMF, India’s economy will grow by 7.2% in 2014–15 (7.5% in 2015–16) as opposed to China’s 7% (7.2%), which gives reason to speculate that in the next couple of years, India will take over China’s role as the world’s fastest-growing economy.1 In the light of this, cooperation with India should be continued and intensified.

EU interest in India in the light of shifting power in the world and economic growth

The European Union started to pay more attention to Asia in the early 2000s, when China’s economic growth became more noticeable in both the regional and global contexts. In the light of China’s success, the growth of other countries in the region was examined, including the economic potential of India. The predicted growth of India’s economy made a strategic partnership between the EU and India inevitable. Shifting power in the world caused the long-lasting relationship established in the 1960s mainly on an economic basis to develop into a strategic one.
The strategic partnership became a reality in 2005, with the difference supposed to be a new “qualitative” dimension by a political side being added to the erstwhile mainly economy-based cooperation. This political dialogue and cooperation was supposed to contribute to the involvement of the two great powers in world issues and the advancement of peace in the context of a new and changing world order.2 Since 2005, the EU and India have recognised each other’s importance and have occasionally worked harder to develop relationships. They have also called each other “natural partners”, as they share common values and beliefs on the principles of human rights, democracy, pluralism and the rule of law.3
Both sides have high expectations about a more meaningful and deeper relationship, but the connection is still more an effort than a strategic partnership. Owing to the strength and importance of both sides, trade and the economy still dominate their relationship.

The economic importance of the EU and India to each other

The economic crisis of 2008 weakened the EU’s competitiveness and the economic growth of India also suffered a setback. As a result, the pre-crisis 9% annual increase in GDP of the “Asian elephant” dropped below 4%. India’s economic growth recovered in 2009, but the crisis further confirmed that India needed the EU’s markets and investment, and the EU in turn needed India’s potential. In 2014, India’s economy grew almost as fast as China’s, and it is predicted that, in a couple of years, India’s GDP will increase further.4
The EU market, with its customer base of more than 500 million people, is India’s largest trade partner, accounting for 13% of its trade in goods. India was the EU’s tenth-largest trade partner in 2013, with 2.1% of the entire trade in goods.5 When we add the EU’s share of world trade (16% in 2013)6 to this, it is clear that the parties are economically important to each other and the relevance is on the increase.

Growth of the biotechnology sector and changes in the retail market

Biotechnology is one of the most developed sectors in India, and is also one of the highest priorities for economically important research cooperation between the EU and India. The Indian government plans to invest US$ 3.7 billion in the sector between 2012 and 2017, and to increase the value of the biotechnology industry to US$ 100 billion by 2025.7 India is trying to attract foreign investment into the country, and promote cooperation with international business and research institutions. Biotechnology is one of the few fields in which 100% of direct foreign investment is automatically allowed in specific areas, meaning that no special authorisation is required from the government or central bank.8 Nevertheless, certain procedures must still be undertaken and appropriate certificates submitted prior to investing.
Biotechnology is one of the fastest-developing high-priority sectors in India, but possibilities in retail should not be ignored. Based on India’s economic growth, the country is predicted to develop a considerable middle class, of some 475 million people by 2030 compared to 50 million today. Calculations show that, since 2007, India’s contribution to the worldwide increase of the middle class has been greater than that of China.9 In the context of the growing middle class, India’s retail market is going through great changes, from consumer preferences to substituting traditional trade with more modern ones. Increasing urbanisation, the influence of Western culture and young people’s longing for a better life are the main factors in the changing Indian consumer market.10 The market’s shift towards a Western retail model and changing its pyramid structure11 thus offer new possibilities for international companies.12
Although India’s consumers are regarded as considerably more price-sensitive than Western middle classes, the market’s potential and the growing awareness of locals about the quality and brands of products should not be underestimated. Middle-class income is increasing year by year also due to the focus of business activity on Mumbai, Delhi, Bangalore and Hyderabad, which is why people are increasingly more willing to pay a little more for a product.13 The educated youth of today’s India want to enjoy the same lifestyle they see in Hollywood movies portraying the middle class in the US and to consume products of Western quality on a daily basis.

India really wants change but is only moving slowly towards it

India’s market is large, complex and comparable to a mix of many small markets. In a way, its diversity mirrors the plurality of India’s cultures and religions, which are also reflected in the abstruse local business culture. If we also consider the governing system, in which local and central government units each have their own rules and regulations—which it is imperative to follow—it can be said that entering India’s market is complicated but not impossible.
India is aware that its complex legal framework diminishes the interest of foreign businesses and investors, thus hindering economic growth. Prime Minister Narendra Modi, who came to office in 2014, has therefore set a firm course towards long-anticipated economic reforms, something his predecessors, including Manmohan Singh, could not carry through.
Modi has set the ambitious goal of raising India from 134th in the World Bank’s Ease of Doing Business index to the top 50 by 2017.14 While reaching this target by the given deadline is unlikely with the current pace (critics claim that Modi has changed nothing in his first year in power15), the first reforms for simplifying business methods have been launched. Examples include e-Biz and e-Kranti (“e-government”), which should simplify access to government services for both locals and foreigners.
Modi has also promised to speed up reform of the framework regulating business activities and the tax system, making the government’s actions more transparent and effective.16 The long-expected land ownership reforms that the governing Bharatiya Janata Party (BJP) has been trying to introduce since the end of last year, despite the opposition’s resistance, are also expected to enter into force. The change should solve the largest obstacle to economic growth so far—inadequate infrastructure.17
Reforms promoting economic growth in India have been planned for years, however, and even if the current government succeeds in its aims, reform is a long-term process and the results are gradual.

India’s growth offers great possibilities, but only with the cooperation of your country’s businesses and government

The difficulty of entering the Indian market due to price sensitivity and the cultural and legal framework means that preparations should be started as early as possible, and in close cooperation with your home country’s businesses and diplomatic missions. Business and negotiations with India do not follow our understandings and cultural norms; the 2013 arrest of Estonian guards serving on an anti-piracy ship is a good example. Although this matter involves political negotiations, it is still an example of different cultural norms and convictions, the lessons of which can be applied in business. Negotiations take time and will probably include setbacks, but the potential of the market and the possibilities for entrepreneurs offset at least part of the trouble.
When entering the Indian market, we should learn from the experience of other businesses and countries—the most important thing is to find a trustworthy local contact or partner with the help of your embassy. The partner should not be chosen solely based on principles; the choice of region should also be taken into account. Questions to be answered include whether and how infrastructure needs to be developed, the proportion of educated people (engineers, for example) in the region’s workforce, and how it fits with the specialisation of the business. And of course, the supply chain must be compatible with local circumstances and rules.18
India’s economic growth is nothing new in itself, even if it has largely remained in China’s shadow, but, due to the ambition and reforms of Prime Minister Modi, there is still hope that the boost that the state achieved through business will finally gain government support so that foreign capital can be involved and foreign enterprises can do business more easily. In this context, Estonia—a member of the EU and holder of the EU Presidency in 2018—has a good chance to develop economic relations with India in the near future by creating a programme and coordinating activities with the UK in the presidency trio and the recently opened Estonian embassy in New Delhi.
1 Kenneth Rapoza, “India Growth Will Beat China This Year”, Forbes, 9 March 2015.
2 “Political Declaration on the India–EU Strategic Partnership”, India–EU Summit, 7 September 2005, p. 1.
3 One of the most important signs of the lost “openness” and, to some extent, the result of many aforementioned problems, might be the cancelled summits of 2013 and 2014. Official justifications for these blamed difficulties in finding suitable dates.
4 “GDP Growth in India and China: Catching the Dragon”, The Economist, 9 February 2015.
5 “Trade in Goods with India, 2014″, European Commission, Brussels, pp. 9–10.
6 “EU Position in World Trade”, European Commission 2014 (ec.europa.eu/trade/policy/eu-position-in-world-tra…).
7 “Biotechnology”, Government of India, Department of Industrial Policy & Promotion, Ministry of Commerce & Industry 2015 (makeinindia.com/sector/biotechnology/).
8 “Consolidated FDI Policy of 2014” (valid from 17 April 2014), Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, 2014, p. 75 (dipp.nic.in/English/investor/FDI_Policies/FDI_poli…); “Foreign Investments in India” FAQs, Reserve Bank of India, 2015 (www.rbi.org.in/scripts/FAQView.aspx?Id=26).
9 “Hitting the Sweet Spot: The Growth of the Middle Class in Emerging Markets”, Ernst & Young, 2013, p. 5 (www.ey.com/Publication/vwLUAssets/Hitting_the_swee…).
10 Sita Mishra, “A Paradigm Shift from Pyramid to New Multifaceted Consumer Class in India and Its Impact on Organised Retailing”, Journal of Marketing & Communication, Vol. 5 (2009) No. 2, p. 32.
11 As a result of the fall of the pyramid structure, predictions state that a relatively large number of very wealthy consumers are at the top, an extremely large middle class is in the middle and consumers in an economically unfavourable position are at the bottom.
12 Gopal Das and Rohit Vishal Kumar, “Impact of Sales Promotion on Buyers’ Behaviour: An Empirical Study of Indian Retail Customers”, Globsyn Management Journal, Vol. 3 (2009) No. 1, p. 12.
13 “Indian Retail: The Next Growth Story”, Great Britain–India Business Convention “Connect 14” Looking to New Horizons, 2014 (www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPubli…).
14 Shantanu Nandan Sharma, “How Modi Government Is Working on a Three-Pronged Strategy to Improve Ease of Doing Business Rank”, The Times of India (The Economic Times), 8 February 2015.
15 Puja Mehra, “Nothing Has Changed on the Ground, Says Deepak Parekh”, The Hindu, 18 February 2015.
16 Narendra Modi, “Prime Minister’s Inaugural Address at Economic Times Global Business Summit”, 16 January 2015 (www.narendramodi.in/economic-times-global-business…).
17 “Govt Approves Ordinance to Ease Land Acquisition Act to Push Reforms”, The Times of India, 29 December 2014; Globalpost, “India’s BJP Gov’t Appeals to Opposition Not to Block Reform”, Xinhua News Agency, 19 March 2015.
18 “Opportunities & Challenges in the Indian Market: Lessons Learned from Dutch Companies in India”, The Netherlands Embassy in New Delhi, Kingdom of the Netherlands, 17 December 2013 (india.nlambassade.org/binaries/content/assets/post…).


This article was published in ICDS Diplomaatia magazine.

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