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Run a business in India

At a glance

  • Fluent in English and institutionally similar to UK
  • Like China, it has a large and growing middle class, so is a good market for retailers and leisure operators
  • Number one location for outsourcing business, particularly in software services
  • Second largest number of engineers and scientists in the world, after the US
  • Telecommunications infrastructure is world-class, unlike transport infrastructure
Run business in India

Eclipsed by its neighbour China in the media, India is often overlooked as an economic power.

Yet like China, it consistently posts high rates of economic growth, which is similarly enabled by an abundance of cheap, skilled labour. India also has a lower dependency ratio - the median age is only 24 - and, unlike its neighbour, it is democratic and boasts the largest English-speaking population in the world.

Fluent in the language of business, India has made itself an obliging host for foreign direct investment

Fluent in the language of business, India has made itself an obliging host for foreign direct investment (FDI). Tax structures have been rationalised and quantitative restrictions on imports removed. The government actively encourages FDI participation in all but six strategic economic areas.

Until the 1980s, India had been a closed control-and-command economy. An unwieldy public sector dominated industry, while private companies floundered under regulatory constraints and bureaucratic inertia.

FDI was previously discouraged by a protectionist mentality, manifested in high tariffs and legislation favouring Indian companies.

Rapid growth

Embracing the free market has resulted in an average growth rate of 6.8% in the decade up to 2004. This is slower than China's rate of around 9%, but rapid growth began later in India and some analysts believe it could overtake China in the years to come.

Despite this, protectionism, rigidities and wasteful public spending persist. Privatisation of government sectors was curtailed in 2005, even though the state and federal budget account for 9% of GDP - a source of concern at the World Bank.

Corporate tax is still higher for foreign companies at 40%, with a 2.5% surcharge - 5% higher than for local companies. In mitigation, this rate is comparable with developed countries.

A range of concessions are granted in some areas, including in infrastructure; the development and operation of industrial parks and 'special economic zones'; and for the handling, storage and transportation of food.

Damningly, the World Bank's report Doing Business in 2005 said starting a business in India was hampered by procedural delays. It takes nearly three months in India, compared to just five days in the US, 18 days in the UK, and 41 days in China.

Enforcing a contract takes 425 days, whereas in England it takes 288 days, and only 48 days in the Netherlands. It is wise to build in safety margins when doing business in India.

Obtaining a visa, fortunately, is easy.

A dichotomy exists between traditional rural villages and increasingly cosmopolitan cities such as New Delhi, Mumbai and Bangalore. Traditional farming co-exists with modern agriculture, as do handicrafts with modern industry.

 

Old India is embodied in its labour-intensive agrarian sector, employing two-thirds of the workforce even though its contribution to GDP as a proportion has shrunk to a fifth. The service sector meanwhile, accounts for over half of GDP, but only a quarter of the workforce.

Structural shift

India is shifting focus from heavy industry, such as the manufacturing of machinery and production of steel, cement and chemicals, toward high-technology sectors such as software development and pharmaceuticals.

Natural resources include coal, iron ore, manganese, mica, bauxite, titanium, ore, chromite, natural gas, diamonds, petroleum and limestone.

Major exports are chemicals, textile and leather goods, gems and jewellery, agricultural products, engineering goods, and software services.

The most famous domestic industry is the 'Bollywood' movie industry, producing 800 films annually. As the large middle class continues to grow, opportunities in the leisure and retail sectors will proliferate.

Bordering China and home to a sixth of the world's population, India offers significant benefits to business. India is also positioned along the key Indian Ocean trade routes through the Arabian Sea and the Bay of Bengal.

The UK is the biggest cumulative foreign investor in the country, and its second largest trading partner. The reasons for this are manifold, and partly attributable to the colonial legacy.

English is the lingua franca in India. The Indian legal system is based on British common law and its political institutions also owe much to their British equivalents.

The fiscal year begins at the same time, in April (the busiest time of the year - so don't conduct too much important business then). A large Indian Diaspora in the UK - and indeed the globe - facilitates business links.

Michael F Corbett, CEO of Michael F Corbett & Associates Ltd - a company that promotes outsourcing - identified, in an interview with ciol.com, a "number of highly qualified professionals for R&D and financial analysis" as an underused resource.

"Avenues keep opening up for outsourcing - the latest of which is in the area of drug testing," he added. In 2005, only the US applied for more drug patents.

Pharmaceutical firms such as Astra Zeneca, Ranbaxy and GlaxoSmithKline also have operations in the country. India is at the forefront of science and technology - only the US has more scientists and engineers than India, and Bangalore has more than Silicon Valley.

However, Corbett predicted that "the sector will plateau in about two years time" due to automation, competition and a staffing shortage, which he has forecast for the end of 2006.

India is the number one location for software outsourcing. Microsoft and Intel recently announced billion dollar investments, much of which is surprisingly earmarked for rural areas.

 

Dotcom boom

India's very own 'dotcom boom' is beginning to flourish, and with 38 million now online, the internet is a good way to reach Indian consumers. India has an advanced telecommunications infrastructure in all regions, and possesses one of the largest domestic satellite systems in the world.

But it is still hamstrung by poor transport infrastructure. Despite government largesse in public spending, red tape, corruption and poor governance have thwarted attempts to build an efficient, joined-up transport system in a country characterised by regional disparities.

Some regions boast good infrastructure and good governance; others don't. The latter can be more competitive due to low labour costs, but then cannot sustain it - be sure to carefully consider where to locate your business.

New Delhi and Mumbai are major economic hubs. Calcutta is synonymous with deprivation and overcrowding, but in the state as a whole, West Bengal, the IT sector is growing at a staggering 72% annually. Run by avowed Marxists, however, FDI is still blocked when domestic interests are threatened.

Periodic problems arise with Islamic, Hindu and Sikh extremists. Yet, on the whole, India is a paradigm for a multicultural, cohesive society - and a relatively stable place to do business. A process of rapprochement is even tentatively underway with the old foe Pakistan.

Building business relationships Joint ventures with Indian companies offer established marketing and distribution networks, as well as crucial local knowledge. But Indians tend to build relationships gradually, sometimes disregarding timetables in the name of thoroughness - so be patient when instigating business deals.

Indian businessmen often make intuitive judgments on character, so credibility in business negotiations is key. Showing interest in their family is a good way to ingratiate oneself. And it is normal - even advisable - to invite business contacts to your home and to accept reciprocal invitations.

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