The Neuburger Gesprächkreis hosted a prestigious symposium on June 7th, focusing on “Incredible India!”. Key speakers included the German Ambassador to India, Dr. Philipp Ackermann, and the Indian Ambassador to Germany, Harish Parvathaneni. Through a live connection with the ARD correspondence studio in New Delhi (with Mrs. Charlotte Horn), participants received analyses of the elections in the world’s largest democracy (970 million eligible voters!). In one of the two panel discussions, India was evaluated as an investment destination from an entrepreneurial perspective.
I participated in this panel discussion as a discussant, along with Chaitanya Divekar, Partner at Divekar Wallstabe & Schneider Ltd. (Manufacturing), Martin Wörlein, Partner at Rödl & Partner, and Peter Born, Chief Representative Officer of Commerzbank in Mumbai. During the analysis of India as an investment location, there was substantial agreement among the participants. Below are some key points from the discussion, supplemented with information from “The Economist,” which dedicated a multi-page special report to India as a business location in its May issue.
The first question seeks to analyze the factors driving India’s high economic growth, including the contributions of the government under Narendra Modi.
A key part of India’s successful business model remains the IT and BPM industry, which continues to exhibit growth momentum. In recent years, this model has expanded to include so-called “Global Capability Centers” (GCCs). These centers provide high-quality and highly productive services, including research and development, semiconductor design, and product development. Global players are particularly invested in establishing these GCCs, with recent examples including UPS and Roche Pharma. Like the IT/BPM industry, GCCs are largely unaffected by India’s infrastructure or customs clearance challenges, as their outputs are “digital products.” According to a new study by Wizmatic, Global Capability Centers employ around 3.2 million people and generate approximately $120 billion in revenue.
The discussion round also reached a consensus that the Modi government has not achieved its goals for strengthening India as a manufacturing/production hub under the “Make in India” initiative, which aimed for a 25% share of GDP. However, India is benefiting, to a lesser extent, from shifts in global value chains seeking alternatives to China (keywords: De-Risking, China+1). Notably, Apple‘s high-profile investment in iPhone production in India, driven by quality improvements in manufacturing, can be seen as a significant milestone.
The Modi government has undertaken numerous measures to develop the country as an attractive business location. Significant investments have been made to improve infrastructure, widely regarded as India’s notorious weak point, particularly for the manufacturing sector. Over the past 10 years, approximately 150 new airports have been added, and the road network has expanded by an impressive 60%.
The business environment has also improved through partial reforms of taxes and bureaucracy. In 2017, the Goods and Services Tax (GST) was introduced, significantly simplifying cross-state trade with a fully electronic, paperless system. In 2019, corporate taxes were reduced from 35% to 25%. As a result, companies today enjoy a return on equity (ROE) above the global average. Additionally, the number of startups has tripled compared to the reference year 2015.
The financial sector reform, initiated with the appointment of the new governor of the Reserve Bank of India, has been further pursued by the Modi government. Historically, the capital market’s weaknesses meant that ordinary people had limited saving options, companies faced high capital costs, and there were issues with high inflation and a growing problem of non-performing loans at state-owned banks.
Under Modi the number of state-owned banks was reduced from 27 to 12 through mergers. The share of non-performing loans is now in a non-critical range. The rules were changed or liberalised, so that for the first time a foreign bank – namely the Singaporean Bank DBS – could take over Lakshmi Vilas Bank, which meant that for the first time an outsider could have a large branch network. This in 2020.
The new, healthier system has made it possible for credit to be available for consumption, housing and industry. Private banks have increased the number of their branches by 60% since 2015 to 163,000 (by comparison, America has 78,000). The stock markets are also booming, reflecting the success of the Indian economy and the expansion of available capital. Ten years ago, the capitalization of the Indian stock market was smaller than that of Spain. Now it is neck and neck with that of Hong Kong and is only surpassed by that of America, China and Japan.
Despite the Modi government’s enthusiastic reform efforts, challenges persist. These issues were also addressed during the panel discussion:
One major barrier to growth is the persistently low expenditure on R&D. India’s R&D spending is just 0.7% of GDP, compared to 2.4% in China and an average of 2.7% in OECD countries.
Despite the reduction in red tape, India still scores comparatively poorly in the Ease of Doing Business index. From the perspective of the manufacturing industry, issues include restrictive labor laws and limited access to usable land. For example, there is a significant backlog of legal disputes, with 50 million cases pending in the courts as of December 2023. To succeed in India, it is crucial to have a network of people who can obtain permits, organize regulatory approvals, and navigate bureaucratic processes. This, combined with the longstanding challenge of raising capital, has led to the disproportionate importance of large conglomerates in India, such as Reliance Industries, Adani Group, Tata Sons, and the Bajaj Group.
Finally, there is a need for reform of governance across levels of government: only 15% of government employees work at the local level, compared to 60% in China and America. Local government spending is a meagre 3% of resources, compared to 50% in China. The problems of “governance imbalance” are acute in the big cities, where elected mayors have a ceremonial function and control lies with state-appointed bureaucrats who are less responsive to local concerns><.
These governance challenges are also noticeable in education: teachers’ pay is not bad, but teacher absenteeism is often around 20-30%, indicating poor governance. As much as the central government would like to remedy this, it cannot; the machinery of education works at the state and local level, to which it has no access.
CONCLUSION: India has undoubtedly initiated and implemented significant reforms over the past 10 years. However, to sustain the desired growth momentum, this reform drive must continue. The goal is to elevate India into the ranks of developed countries by 2047, achieving a per capita income of USD 14,000 (currently USD 2,400).
