India rolls out the red carpet to industrial companies

India rolls out the red carpet to industrial companies (India #6/10)

“India offers you maximum growth: in scale, ambition and in results. Come to India and be part of our growth story.” This is the message on Prime Minister Narendra Modi’s video to visitors at the Indian pavilion of Expo 2020 Dubai. India is inviting companies to invest in the country. They are benefiting from a pick-up in consumption as the middle class grows. Huge infrastructure projects are also cutting logistics costs. Manufacturing subsidies are the icing on the cake.  

Consumption sweet spot

“While it was made very clear that we should not underestimate the difficulties of the logistical and bureaucratic complexity of the Indian market – both exacerbated by the federal state structure – we believe that India offers an opportunity that European consumer goods companies should not ignore.” Our colleagues at BNP Paribas Exane [1] are clearly convinced of India’s huge potential after their study tour in May 2023.

India’s unique demographic profile, rapidly growing middle class and urbanisation and digitalisation trends put it in the consumer goods sweet spot, where China was 10 years ago. “India’s urban population will grow at an average annual rate of +2.3% in the coming years, increasing the urbanisation rate from 33% in 2020 to 40% in 2030 (compared to 61% in China today and 79% in Western Europe). Per capita consumption rises with disposable income. In 2019, the average disposable income per person was USD 1,800, slightly lower than China’s average of USD 2,600 in 2010.” The latter has exploded to USD 6,500 today, along with consumption. The amount Americans spend on consumer goods is 5.5x higher than in China and 30x higher than in India. Growing household consumption will remain the growth engine of the Indian economy for years, if not decades, to come.

Aadhaar, a unique 12-digit identity number based on biometrics and showing demographic data, and its associated free financial account, which can be obtained voluntarily by all residents who have an Aadhaar card, has made credit and hire purchase a reality for more and more Indians today. “This is how America grew in the 1950s,” says Dr Bhagwati, a ‘distinguished fellow’ at the think-tank Centre for Social and Economic Progress (CSEP) and former ambassador to Brussels and elsewhere. “You don’t pay the full price of a product that you buy, but just a fraction of it. And the rest you pay later. This is completely new here, especially for people in rural areas. And slowly the number of people for whom this is possible is growing from 50 million, to 100, 200, 400 million. If consumer finance alone becomes accessible to the rapidly rising number of people migrating to the cities, you are going to see a boom in household consumption.”

Emerging middle class & e-commerce

In 2004, 14% of India’s population belonged to the middle class. Today, it is 31%, or 450 million people. This will drive India’s economy for decades to come. “L’Oreal is focussing to the upper middle class of let’s say 200 to 300 million people,” Stijn Rijckbosch , CFO of L’Oréal India, explains to me. “We don’t sell cola, or water. Our products are slightly more expensive. The number of more affluent people will also increase, our target group is set to double in the next 5 to 10 years.” According to colleagues at BNP Paribas Exane, this affluent class will increase by 14 percentage points (!) to a quarter of India’s population by 2030. But there is another specific factor that will fuel L’Oréal’s growth. “Women are playing an increasingly important role in Indian society. This will encourage them to buy more beauty products.”

And then there is the digital step forward (which we will come back to later). The benefits of e-commerce in rapidly expanding distribution to smaller cities were summed up nicely by Jean-Paul Agon, the former CEO of L’Oréal, at a conference in 2019: “What’s great for us is that e-commerce helps us extend our reach far beyond traditional distribution. As a beauty products company, for years it was difficult for us to go very deep into distribution in countries like India, China, Indonesia and so on. With e-commerce, that problem is off the table and we can reach any consumer in any part of the country.” This is true for mass market sellers such as Amazon, Flipkart, Myntra - in fact so many brands also now have a direct e-commerce platform, and the use of mobile telephony with social media influence is also prompting millions to buy online.

Government takes ownership of infrastructure investment

India is gearing up to attract and welcome foreign companies. Reforms are being made, and hopefully the pace will pick up after Modi’s likely re-election. Until recently, poor infrastructure has been a major stumbling block for foreign companies in this vast country. The Economist Intelligence Unit (EIU) expects the greatest progress in this area over the next few years. India would then move up from 62nd out of 82 countries in the EIU’s ‘business environment’ ranking (2019-2023) to 51st in the 2024-2028 period.

“We were surprised by the rapid pace of development since our last visit in 2018,” our colleagues wrote in their report. “New roads, metro lines and a large shopping mall in Mumbai are examples. You can just feel the growth.” Prime Minister Modi has increased infrastructure spending from RS 1,000 billion in the 2015 fiscal year to an estimated RS 8,000 billion in the last fiscal year. “In the past, the government was counting on the private sector to make these investments,” Shumita Sharma Deveshwar of GlobalData.TSLombard tells me. “But that didn’t work out. Until a few years ago, the banks were groaning under the weight of non-performing loans and had become very risk averse, especially to providing long-term loans for infrastructure projects. Eventually, the government realised that it had to invest money itself. Building infrastructure is seen as one of the core functions of government anyway.”

Note that India is not China. “The real estate explosion and over-investment in construction in China was state-funded,” notes Raman Madhok , economic diplomacy advisor to the Belgian consul general in Mumbai. “In India, basic infrastructure is paid for by the government and the states to attract private investors. Otherwise, they would not come. But now that the infrastructure is starting to come in, private investment is following. These investors are much more cautious than the Chinese government, which reduces the risk of over-investment.”

Accelerated road works during Covid

For the current fiscal year, the government plans to spend nearly 20% of the national budget on capital investment. This is the highest percentage in at least a decade. Construction of roads and highways (Bharatmala), ports (Sagamala), regional airports to open up hitherto inaccessible places (Udaan) and dedicated freight corridors are expected now to be completed by 2027-2028, gradually improving connectivity.

“That bridge for the above-ground metro line that you see from this office, they weren’t working on that last year,” Muhammad[i], a key contact who wishes to remain anonymous, tells me. “Construction is moving at lightning speed. During Covid, the day labourers just kept on working. Because if they don’t work, they don’t have an income. It was a clever move by the government to let this happen. Because there was nobody on the streets, everything went much faster.” In the pandemic year 2020-21, a record 13,298 kilometres were added, or 36.4 kilometres per day. In FY22 and 23, the pace slowed to 29 kilometres per day. For the current fiscal year 2024, the government has set an ambitious target of 45 kilometres per day. “However, the official target is more likely to be closer to 35 kilometres due to delays in obtaining permits and land purchases,” writes the financial newspaper Mint. Some things do not change slowly in India.

Smart cities

Infrastructure development is not limited to roads. Total annual investment in rail infrastructure has quadrupled since 2015. The operational metro network currently stands at just under 900 kilometres spread across 20 cities, but another 1,100 kilometres of new lines are in the pipeline. These will also be built in new cities.

Today, 67 per cent of the population lives in rural areas versus 85 per cent in the 1960s. “People want to migrate en masse to the cities,” Muhammad explains to me. “But if they all do it, and go to the five main cities, these will collapse. They cannot cope with such a mass.” The current populations of Mumbai, Delhi, Bangalore, Calcutta and Chennai are 12.7 million, 10.9 million, 5.1 million, 4.6 million and 4.3 million, respectively, according to the World Population Review.

“So what did the government do in 2015? It funded a hundred smart cities.” Smaller cities received government support for all services and infrastructure, such as water supply, public transport, affordable housing for the poor and so on. In this way, the migration flow could be well distributed across all those cities. “All the facilities are there for citizens, but also for businesses. Next time you come to India, instead of Mumbai and Delhi, go to some of these tier 2 or tier 3 cities. You will find that in terms of infrastructure and economic development, they are perfectly competitive with the big cities.”

Plug and play

The growth and importance of these cities got a serious boost from covid. “Skilled people could suddenly work from home,” says Madhok. “Six months of covid gave companies at least a 10-year step forward in terms of working environment, and they adapted very quickly to this new reality. With the option of working from home, tier 2 and tier 3 cities grew rapidly. New buildings were erected including new shopping malls, which in turn created more jobs and income. When you see all this happening, you have to be very risk-averse not to want to be here as a consumer company.”

Pune, with a population of 6.2 million, is one such city in the midst of change. There are construction projects everywhere, half-finished skyscrapers and an overland metro line under construction, as journalist Nico Tanghe of De Standaard[1] describes in his travelogue. It used to take 7 hours to drive the 165 kilometres – a short hop in Indian terms – to Mumbai. A new toll road has cut the journey to 3.5 hours. And a third motorway, currently under construction, is expected to cut travel time by a further half. The Bekaert steel company has set up a state-of-the-art plant in one of the large ‘five-star’ industrial estates on the outskirts of Pune that the Indian government has established especially for it. “All the facilities are available here,” says a local senior executive Srikanth Chakravarthy. “For an industrial company that wants to start here, it is just ‘plug and play’.”

Widening tax base

These industrial companies are also being lured with a sharp reduction in taxes in 2019. “Incidentally, this was the second year in a row that taxes paid by individuals exceeded those of companies,” notes Thomas Easton in his online weekly India Business and Finance. “My guess is that this is a more deliberate strategy on the part of the government to reduce the cost of doing business in order to stimulate growth.”

Widening the tax base would mean a massive increase in taxes – and therefore resources – for the government. In 2014, 35 million people paid income tax, while the size of the non-agricultural workforce was over 200 million. “As a result of implemented reforms, that number has now increased to 78 million,” says Roopa Purushothaman, Chief Economist at the Tata Group. “That is still far from the entire labour force, but with the digitalisation that the government is implementing, this number will continue to rise.”

Make in India

In 2014, the ‘Make in India’ programme was launched. Growth in the industrial sector was to be boosted to 12-14 per cent a year, creating 100 million additional jobs by 2022. By then – but recently pushed back to 2025 – the sector would account for a quarter of GDP. However, the sector’s growth remained stuck at around 7 per cent a year in the period 2014/2015-2019/2020, in line with economic growth. As a result, the industrial share has remained stable.

Nevertheless, Mukesh Malhotra , CEO of Solvay India, continues to believe. “I am convinced that investment in Indian industry will increase significantly in the coming years. India has no other choice.” The scepticism among foreign companies is normal, he says. “In the past, India has always made more noise than it has actually delivered. So these bold statements from India are taken with a pinch of salt, especially if you’ve had a bad experience. But India needs technology, and the red carpet is being rolled out to multinational companies that have it. I get calls from at least two states every month asking me to meet them to discuss new investments.”

Redesigns for the Indian market

Poul Jensen, Managing Director of the European Business and Technology Centre, also sees the need for technology. “Technology at the lowest price, adapted to the Indian environment. What does that mean? That you have to work with Indians, that you do your R&D here, and ideally in collaboration with universities. The consulting firm Accenture already employs 300,000 people in India. Phillips does a lot of research here. Because of the strong mathematical skills of Indians, it is mainly about big data analysis, but increasingly also about redesigning products for the Indian market.”

This redesign to Indian dimensions is often necessary. “You know, I had a Toyota and a Mercedes,” says Dr Bhagwati. “The difference in air conditioning between these two cars is night and day. Why is that? Japanese people come here and want to get to know the people and the environment first. They like golf. They play in Delhi and then drive to, say, Chennai. But in the meantime, they have played golf for several days in 47 degrees Celsius or more. And then they come back to Japan and say to their boss: ‘Nice golf, but I barely got to the 10th hole. In Japan, I do 36, without any problems. But with the heat over there ...’ This experience then leads to the installation of much more powerful air conditioners specifically for the Indian market. You can forget about that with the Germans.”

Cricket versus basketball

A variation on this story is Puma versus Nike. “Nike is not a brand in India,” says Harsha Raghavan , managing partner of venture capital firm Convergent Finance. “Nike has a global market strategy that they don’t deviate from. Their brand ambassadors are Michael Jordan and Tiger Woods. But who plays basketball in India? Or golf? Nike has invested almost USD 2 billion in recent years. This compares to an annual turnover of USD 5 million. A complete failure.”

Their competitor Puma is doing a lot better. “They have invested about USD 30 million over the past 20 years, no more. Today their turnover is in the billions.” When recruiting an Indian marketing team, Puma made it clear that they had no global sponsorship deal and that the team would have to make do with a “small” budget. “They told the marketing team to do with it what they thought they should,” continues Raghavan. “And they did. They hired cricketers, icons of India’s national sport. They understood what India is all about and managed to do something appropriate with a lot less money. India is not part of the global market. It is a market in its own right!”

Production Linked Investment scheme

If you are successful in India, you will succeed in other countries too, says Jensen. “Co-developing customised products with the Indians has not hurt General Electric, for example. They developed a low-cost mobile defibrillator that they could then export to other countries.”

More recently, foreign companies’ enthusiasm for India seems to be growing, even as China becomes more politically difficult. One of the mainstays of the ‘Make in India’ programme is the Production Linked Investment (PLI) scheme that gives companies grants to set up manufacturing hubs in India. “This is what has made ‘Make in India’ a reality,” says Mukesh. “Before that, it was just a slogan.” Initially, 14 sectors – mostly high-tech – were chosen in which India wanted to become a global producer. The goal is to replace imports with exports. Market participants see the PLI scheme as a signal that the government wants to work with the private sector. The cost is limited, according to the IMF, but the projected job creation is also very meagre at 6 million – 2 to 4 per cent of the total number of jobs needed.

Creating jobs

This is also the main criticism of Amitabh Dubey , political analyst at research firm GlobalDataTSLombard. “The selected sectors like chemicals, phones, computers, EVs, batteries and so on are very capital intensive. So you are putting all your money into specialised sectors that create very few jobs. That is wrong. What India needs is garments, textiles, leather, furniture and so on, the simple labour-intensive industries for people with basic education. We have to create jobs. And every scarce rupee that you spend on attracting business should have that goal in mind.”

In the last financial year, which runs until March 2023, just under 50 per cent of the 12 million jobs created were in IT, finance and banking, according to a roundup by the Bank of Baroda. “The rise in broad industrial employment does not – yet – demonstrate China-like characteristics,” notes Thomas Easton . Dubey cites the example of Micron, which is building a factory to test chips in Gujarat. “India is paying 70 per cent of this project: 70 per cent! I think Micron will make a nice return on its investment,” he notes delicately.

Growth countries are more likely to have a mix of capital and labour as the engines of their economies; in India, growth has recently been mainly capital-driven. The economy is growing like a cabbage, but employment growth is lagging behind. But the latter remains necessary to reap the demographic dividend. Otherwise, inequality will only rise in tandem with growth.

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[1] Nico Tanghe, Will everything soon be 'Made in India', De Standaard, 28 October 2023

[i] Muhammad is a fictitious name.

[1] India’s decade: key learnings from our field trip, BNP Paribas Exane, 31 May 2023