Though COVID-19 has dominated India’s headlines in recent months, the country is usually recognised for its undeniable – and growing – strength across goods and services sectors. Yet the Asian country’s integration into global value chains – measurable by the foreign value-added to India’s exports, and domestic value-added to India’s intermediate good exports – remains surprisingly weak. Peter Born, Chief Representative for Commerzbank in Mumbai, examines why this is the case, and what steps are being taken to address the challenges of the business environment in the country.
Entrepreneurial spirit and innovation are in India’s DNA. Indeed, the past decade has witnessed growing numbers of foreign entities opting to outsource services to India, as well as large swathes of global supplies of food, coal, cement, steel, and electricity being sourced in the country. Given the wealth of opportunity India presents, it is no surprise that it now stands as the sixth largest economy in the world and the third largest by purchasing power parity. The country’s IT industry alone accounts for US$194 billion in revenues, employs over four million individuals, and continues to grow apace.
More recently, India has grabbed headlines for playing a leading role in the manufacture of the Oxford-AstraZeneca, Covaxin, and Sputnik vaccines. The country’s subsequent foray into “vaccine diplomacy” demonstrated its desire to expand its geopolitical horizons, and succeeded in opening the door to new trading relationships and improving existing ones.
Yet, despite its great promise and ambition, India’s integration into global value chains remains underdeveloped and largely untapped – with few lead firms created in the country, and customs and taxes negatively impacting on competitiveness. What’s more, India can be overlooked by foreign businesses that are reluctant to take on the challenges that the country’s business environment presents.
There are many factors at play. Historic policy traditions, such as the Licence Raj – a bureaucratic system to which all Indian businesses were subject between 1947 and 1990 – certainly set a precedent for extensive government intervention into commercial activity in India. The system, which obliged businesses to request permission from up to 80 government agencies prior to commencing production, and, if granted, to be regulated by the government thereafter, limited the country’s competitiveness and ability to participate in global markets.
Limits were also placed on foreign direct investment, and foreign exchange reserves were strictly controlled in terms of allocation across sectors. Though much of the red tape around domestic production has now been lifted, some vestiges of this interventionist approach still linger – Indian labour laws, for instance, are still explicitly prohibitive of the laying off of workers.
Today, the government’s strategy towards the business sector shows signs of some similarly heavy-handed policy-making. In a bid to encourage domestic procurement in support of local manufacturers – many of which were being undercut by cheap foreign imports – the government increased import duties. This has negatively impacted India’s competitiveness in global markets, given that companies are no longer able to access cheap raw materials and must instead increase the price of their end-products to offset the loss. The country’s desire to become self-reliant and boost domestic production is therefore threatening the survival of many of India’s micro-, small- and medium-sized enterprises (MSMEs), which make up a sizable proportion of the country’s GDP.
While some strategies may be short-sighted in their execution, the business environment in India is tangibly improving – as evidenced by India’s rapid rise in the World Bank’s ‘Ease of Doing Business’ rankings, from 143rd (out of 190 countries) in 2014 to 63rd in the 2020 report. The pandemic, of course, represents a setback in delivering upon the new opportunities this should create. But the country has nonetheless continued to become increasingly connected, resulting in freer movement of labour and bringing new opportunities for young, ambitious workers across India. Alongside this, growing investor emphasis on environmental, social, and governance (ESG) factors has triggered the emergence of new tech startups in India. And liberalisation in some licensing requirements, as well as the accelerating “Make in India” campaign, have also encouraged increased foreign participation and investment in India’s manufacturing sector.
Furthermore, although China has regained its position as India’s closest trading partner, India has been forming close ties elsewhere and exploring new opportunities. For example, the EU-India relationship is expected to grow, particularly following the recommencement of talks around a free trade agreement at the EU-India summit in May this year. The UK, too, expects to increase its collaboration with India across a range of industries, including pharmaceuticals, fintech, chemicals, petroleum, and food products.
Of course, harnessing this huge potential relies on banking partners that are able to facilitate commercial activity amidst both the pandemic-induced complexities and also the country-specific challenges that are unique to India. No doubt, these hurdles will continue to dissipate in the coming months and years, particularly as the government’s “less government, more governance” strategy comes to fruition. In the meantime, reconciling the paradox that characterises India’s business landscape may present challenges, but these are outweighed by the potential rewards for doing so.