India- New Economy Old Economy

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Commonwealth of Australia 2001

This work is copyright. Apart from any use permitted under the Copyright Act 1968, no part may be reproduced

by any process without prior written permission from the Economic Analytical Unit. Requests and inquiries

concerning reproduction and rights should be addressed to the Executive Director, Economic Analytical Unit,

Department of Foreign Affairs and Trade, RG Casey Building, John McEwen Crescent, Barton ACT 0221.

Austrade contributed to the cost of producing this report.

National Library of Australia Cataloguing-in-Publication data: 12 November 2001

India: new economy, old economy.

Bibliography.

ISBN 0 642 56583 X

ISBN 0 642 56584 8 (CD-Rom).

1. Investments, Foreign India. 2. India Economic conditions. 3. India Foreign economic relations.

I.Australia. Dept. of Foreign Affairs and Trade. Economic Analytical Unit.

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A c k n o w l e d g e m e n t s

ACKNOWLEDGEMENTS

This report was directed by Michael Growder, Acting Director, Economic Analytical Unit and James Hyndes,

Deputy Director, was part of the production team. Dr Frances Perkins, Executive Director, provided advice

and oversight. Bill Brummit, former Director, also contributed to the report.

The Australian High Commission in New Delhi provided invaluable assistance in producing this report,

coordinating Economic Analytical Unit visits to India, providing relevant material, data and comments

on the report. We thank Rob Laurie AM, former High Commissioner; Bryce Hutchesson, Deputy High

Commissioner; Elizabeth Ward, First Secretary; Julie-Ann Guivarra, Third Secretary; Clare Duffield,

Third Secretary; Seshadri Sathyamurthi, Research Officer; Mary Lupul, Country Manager, Australian

Centre for International Agricultural Research; Bernadette McDonald, Counsellor, Australian Education

International, and Dr Sheel Nuna, Senior Manager, Australian Education International.

Within the Department of Foreign Affairs and Trade in Canberra, we thank Pamela Fayle, Deputy

Secretary; Gillian Bird, First Assistant Secretary, South and Southeast Asia Division; Patrick Suckling,

Tony Huber, Judith Laffan, David Holly, Michaela Browning, Susan Begley, Sunny Idehen, John Powys,

Tim Yeend and Trent Smith for their valuable assistance.

Within Austrade, we thank Roger Bayliss, Executive General Manager, Middle East and Indian Ocean

Region, Dubai; in New Delhi, Rick Kovac, Senior Trade Commissioner; Richard Francis, former Trade

Commissioner; Rajeev Varma; Sanjay Khandelwal, Manager; Alka Batra, Business Development

Manager; Harsh Mohan Puri, Business Development Manager; Punish Raheja, Market Research

Officer; Amarpreet Singh, Assistant Operations Manager; in Mumbai, Shabbir Wahid, Consul General

and Trade Commissioner; in Chennai, Ayub Tareen, Post Manager. In Austrade Canberra, we thank

Jessica Ramsden-Smith, Manager, Middle East and Indian Ocean Region; Jim Enright, former

Manager; Lucy ODonnell, Project Manager; Mark Johnson, Project Manager; Annelie Mitchell, Project

Manager, and Joshua Hutton.

The Economic Analytical Unit wishes to acknowledge the contribution made by the following

consultants: Deepak Talwar and Associates, New Delhi; Dr Rajesh Chadha, National Council ofApplied Economic Research, New Delhi, and Professor Kaliappa Kalirajan, National Graduate Institute

of Policy Studies, Tokyo; Professor Bibek Debroy, Rajiv Gandhi Institute, New Delhi; John Fuhrman,

Alister Maitland, Dr Elizabeth Maitland and David Smith, The International Panel, Melbourne; Professor

Marika Vicziany, Monash Asia Institute, Melbourne; Mr Kanhaiya Singh, Australian National University,

Canberra; Mr S.K.N. Nair, National Council of Applied Economic Research, New Delhi; Dr Shashanka

Bhide, National Council of Applied Economic Research, New Delhi, and Professor Richard Shand,

Australian National University, Canberra.

We thank the Australia-India Business Council, and in particular, Neville Roach, President; Bernie

Delaney, Vice President; Chris Hartley, Vice President; Jacqueline Allen, Executive Director; and

Paddy Daly, former Secretary.


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I N D I AN E W E C O N O M Y , O L D E C O N O M Y

Special thanks are due to the following people in India, Singapore, the United States and Australia

who gave time to be interviewed by the Economic Analytical Unit, and supplied material, information

and insights.

In India, we thank:

George Abraham, General Manager, Mahindra Industrial Park Ltd; John Alexander, Vice President,

J. M. Baxi and Co; Dr Anil Sharma, Principal Economist, Dr R. Venkatesan, Principal Economist,

National Council of Applied Economic Research; Nirupa Bhatt, Manager, Argyle Diamonds;

DrPronabSen, Adviser, Planning Commission; Dr Omkar Goswami, T K Bhaumik, Senior Advisor,

Sunil Parekh, Director, K. S. Ganesan, Executive Officer, T.S. Vishwanath, Consultant, Confederation

of Indian Industry; Dr Shiela Bhide, Principal Secretary, Andhra Pradesh Ministry of Industries and

Commerce; Devendra Chaudhry, Director, Ministry of Information Technology; Professor M. Govinda

Rao, ISEC; VK Srinivasan, Nilgiris Supermarket; N. K. Choubey, Managing Director, Vikram Desai,

Principal, Ajay Khera, Consultant, Central Warehousing Corporation; Dr S.K. Chaudhuri, Regional

Director, International Wool Secretariat; Anjuly Chib Duggal, Director, Ministry of Commerce and

Industry; S.K. Dhar, Regional Manager, SMEC; Dr Tarun Das, Economic Adviser, Ministry of Finance;

G. Gurcharan, Government of Karnataka; Satya Priya Gupta, Joint Secretary, Ministry of Mines;

Ashutosh Ghanekar, Associate Director, Preeti Sinha, Senior Manager, Rabo India Finance Pty Ltd;

Barry Moss, National Sales Director, Ranier Harding, National Product Manager, Elcon-Clipsal India

Ltd; Siddharth Jain, Manager, Rio Tinto; Ashok Jha, Advisor, S. Sunanda, Senior Assistant Secretary,

Federation of Indian Chambers of Commerce and Industry; Vinay Jha, Principal, Antares; SanjeevKapur, Director and Country Manager, Lumley Technology India; P. B. Patel, Senior Vice President,

Snehal Kantharia, General Manager, Samir Mankad, Deputy General Manager, Adani Exports Ltd;

Sunil Vaze, General Manager, Indranil Dasgupta, Analyst, Enron India Pty Ltd; Prakash Kuruvilla,

Senior Manager, HSBC; S. Krishnan, Manager, Infosys; John Lyndon, Australian Team Leader, India

Australia Training and Capacity Building Project; Sunil Tandon, Managing Director, Port of Pipavav;

S. Madhusudan, Vice President, GVK; Adit Jain, Managing Director, Anuradha Das Mathur, Vice

President, EIU; Poonam Kumar, Chairperson and Managing Director, Mega Ace Consultancy Ltd; K.

Narayan, President, S. Mohnot, General Manager, Prateek Panday, General Manager, Reliance

Industries Ltd; Lucio Monari, Senior Economist, Stephen Howes, Bhaskar Naidu, Mandakini Kaul,World Bank; Ajay Narayanan, Vice President, IDFC; S. Narayanaswamy, Technical Consultant,

Tri-Sakthi Energy; Ridham Desai, Vice President, JM Morgan Stanley; Aashish Pitale, Vice President,

Shuchita Mehta, JPMorgan; Narendar Pani, Senior Editor, The Economic Times (Bangalore);

ArunPatel, Managing Director, MCC; Dr Indira Rajaraman, Chair Professor, NIPFP; Rajan Sudesh

Ratna, Joint Director General, Ministry of Commerce; Walter Joseph, Regional Director, K.V.V. Rajan,

Marketing Advisor, Western Australian Trade Office; T.L . Ramachandran, Senior Manager, Andhra

Pradesh Industrial Infrastructure Corporation Ltd; Nandlal Rungta, Managing Director, Rungta MinesLtd;

Pradip Shah, Chairman, IndAsia; Asit Shah, Director, Credit Suisse First Boston Securities Ltd; DrK.N.

Shelat, Industries Commissioner, S.A. Dula, General Manager, Arvind Shukla, Managing Director,Jignesh Vasavada, Deputy Director, Gujarat Industrial Extension Bureau; Bhashit Dholakia, Manager,

Metropolis Gas Pty Ltd; Dr U Sankar, Professor, Madras School of Economics; N. Sriraman, Managing


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A c k n o w l e d g e m e n t s

Director, Karnataka Udyog Mitra; R.K. Sharma, Secretary General, Satyajit Singh, Deputy Secretary,

Federation of Indian Mineral Industries; David Twine, Vice President and Country Manager,

BHPBilliton; DrK.K. Tripathi, Director, Department of Biotechnology; Robert Thomas, Managing

Director, Gujarat Gas Company Ltd; Dr Jandhyala Tilak, Senior Fellow and Head, National Institute

of Educational Planning and Administration; Vipul Tuli, McKinsey and Co; Captain Jimmy Sarbh,

P&O Ports; S.Vijayaraghavan, Customer Relations Officer, Tidel Park Ltd; Dr Kamal Raj, Director,

Dr D. Ajit, Director, B.K. Bhoi, Director, Asha Kannan, Director, Deepak Mohanty, Director, M.R. Nair,

Officer-in-Charge, Dr N. Nagarajan, Adviser, R.M. Vasanthakumari, Adviser, Reserve Bank of India;

Pramit Palchaudhuri, Senior Assistant Editor, The Telegraph; Saumitra Chaudhuri, Economic Advisor,

ICRA Ltd; Ravi Narain, Managing Director and CEO, National Stock Exchange of India Ltd.

In Singapore, we thank:

Lindsay Coburn, Head of Research for Asia, David Forrester, Economist, IDEA Global; Michael Lim,

Director, Takahira Ogawa, Director, Standard and Poors; and Sanjay Mathur, Associate Director,

Warburg Dillion Read.

In the United States, we thank:

Vijay Kelkar, Executive Director for India, Elizabeth Winters and Gary Pursell, World Bank; Dr John

Williamson, Senior Fellow, Institute for International Economics; Tim Callen, Ranil Salgado,

International Monetary Fund; Dr Ashok Gulati, Division Director, International Food Policy Research

Institute.

In Australia, we thank:

HE Rajendra Rathore, High Commissioner, Pavel Diengdoh, Deputy High Commissioner, Indian

High Commission, Canberra; the Hon Mike Ahern, Special Representative for Queensland,

Queensland Government;Peter Buckley, Country Program Manager, Percy Stanley, Director, AusAID;

Warwick Spicer, Cactus Imaging; Kamalesh Goswami, NIIT; Paul Bridgwood, Executive Manager,

Energy Equity Corporation Ltd; Zarir Bamji; Peter and Margaret Scanlan, Peter Scanlan Wools; Katrina

Spencer, Australian Wheat Board; BillHenderson, Gerard Industries; Richard Bushell, Marketing

Director, Warman International Ltd; JoEvans, Environment Australia; Ashley Cross; Richard Cameron,

Architect, Australian Hospital Design Group; Don Cunningham, Regional Manager, Pacific Power;

Megan Durant, Marketing Manager, RMIT University; Jeff Williams, Managing Director, Mel Drummond,

Director, Mineral Deposits Ltd; Dr Stewart Routledge, Executive Director, Natasha Davis, Project

Manager, GRM International Pty Ltd; Carl De Koning, General Manager, Air International; Graham

Ferguson, Senior Manager, Robert Krakowiak, Senior Manager, Reetica Rekhy, Consultant, Australian

Business Ltd; Darren Gribble, Darren Gribble and Associates Pty Ltd; John Grounds, Consultant,

URS; Collins Hiss, Managing Director, Michelle Stegbauer, Marketing and Communications,

RonMorcom, Margaret Crowley, Lumley Technology; Ross Hitt, David Guy, SMEC; John Eckermann,

John McPartland, former Director, Gilbert Hennequin, Regional Manager, Monash International; Lyle

Jackson, Managing Director, Union Switch and Signal; Scott Lambert, Director, Frances Rose,

Australian Education International; Sean Mahony, Business Project Manager, Randeep Agarwal,


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Woodside; Gayle OBrien, Senior Trade Officer, Queensland Department of State Development; Linda

Young, Export Manager, Fred Parker, Mining Consultant, Runge Pty Ltd; Russell Pynt, Director of

Marketing, Chalmers Institute; John Ulhir, Managing Director, Ulco Medical; John Burgess, Greg

Rashford, former General Manager, Rio Tinto; Simon Johnson, Director, Jacob Verghese, Regional

Manager, West Australian Department of Commerce and Trade; Kim Rintoul, Marketing Officer,

AgraCorp Pty Ltd; Alan Roy, Director, White Mining Ltd; Sig Sovik, General Manager, Telstra; Hitesh

Shah, Business Manager, AXA; Gordon Thompson, Managing Director, Kristy Johnson, International

Centre for Application of Solar Energy; Lyndal Thorburn, Advance Consulting and Evaluation Pty Ltd;

Alistair Henderson, Managing Director, Gary Worth, Business Services Director, Baltec Systems Pty

Ltd; Richard Tait, Head of Customer Technologies, Dinesh Anand, Regional Credit Executive, Elmer

Funke Kupper, ANZ; Kerri Redfern, Senior Executive Officer, Robyn Ellison, Senior Strategy and

Planning Officer, Argyle Diamonds; Jamie Seccombe, Colly Cotton; Gordon and Patty Wright; KevinBaddiley, Chairman, Australia-India Fresh Food Alliance; Maurice McGrath, Fosters Group; Kate

Pembroke, Government Relations Officer, Australian Tourist Commission; N. Balakrishnan, Regional

Manager, International Division, Berri; MegsGildea, TV Series and Features Manager, Cutting Edge;

Gary Linton, General Manager, Greenspan; Sheridan Hume, Manager, Alan Freshwater, AMP; Dave

Isles, Grenfell Resources; Danny ODea, Australian Bureau of Statistics; Mike Turbott, Managing

Director, Austpac Resources; Purvez Bilimoria; Christopher Snedden, Editor, Australia-India Focus;

George Smith, Richard Wooland, Department of Primary Industries, Queensland; Paula Collins, Collins

Group; Alan Manly, Director, Liam Kenny, Marketing and Client Services Manager, Central College; Anil

Verma, Director, Polaris Software Pty Ltd; Murray West, Partner, Alpana Roy, Solicitor, Clayton Utz.

We also thank BHP Billiton who is the Economic Analytical Units corporate sponsor, and Austrade,

who sponsored the report.

Lyn Lalor did the typesetting and figures and Greg Carter provided administrative assistance.


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T a b l e o f C o n t e n t s

CONTENTS

ACKNOWLEDGEMENTS iii

ECONOMIC ANALYTICAL UNIT vii

EXECUTIVE SUMMARY xv

Macroeconomy and Reforms xv

Trade xvi

Foreign Investment xvi

The Business Environment xvii

The Australia-India Business Relationship xvii

New Economy Opportunities xvii

Old Economy Opportunities xviii

The States xviii

Implications xix

CHAPTER 1 MACRO PERFORMANCE, REFORMS AND PROSPECTS 1

Fast Growing, Better Performing Economy 2Strong Performance in Recent Years 2

Growing Income and Wealth, Falling Poverty 3

Improved Inflation Performance 6

Divergent Sectoral and Regional Performances 6

Economic Sector Divergence 6

Regional Divergence 8

The Reform Process 8

Reform Stimulus 9

Major Reform Focus 9

Financial Sector Reform 10

Reform Results 10

Reform Slowing since Mid 1990s 11

Unfinished Reform Agenda 12

Fiscal Reform 12

Bureaucracy, Infrastructure and Bankruptcy Policies 14

The Future of Reforms 14

The Political Economy of Reform 15

Political Parties and Recent Results 15

Recent Issues 15

Economic Prospects 16

Short Term Growth Outlook 16


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Longer Term Growth Scenarios 17

Assessment 18

Implications 19

Key Indicators 19References 21

Appendix 22

CHAPTER 2 TRADE REFORMS AND TRENDS 23

Major Trade Reforms and Outcomes 24

Less Import Licensing 24

Nominal Tariff Rates Falling 24

Export Controls 26

Floating the Exchange Rate 27

Overall Trade Performance 28Exports 30

Export Composition 30

Direction of Exports 31

Imports 32

Growth and Composition 33

Import Sources 34

Unfinished Trade Reforms 36

Remaining Non-Tariff Barriers on Imports 36

High and Complex Tariffs 37

Biases Against Exports 37

Customs Procedures Difficult to Navigate 37

Participation in Multilateral Trade Forums 38

Implications for Australian Business 38

References 40

CHAPTER 3 FOREIGN INVESTMENT 41

Opportunities in the Dual Economy 42

Successful Sectors 42

Successful States 44

FDI Trends Over the 1990s 44

Country Shares and Trends 46

Foreign Investment Regime 47

Foreign Ownership Limits 48

Preferences for Small Firms 49

Other Restrictions 49

Reform Prospects and Business Implications 49

References 50


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CHAPTER 4 DOING BUSINESS IN INDIA 51

Implications of Indias Culture and History 52

The Current Business Environment 52Setting up a Business 53

Labour Laws 53

Inspections and Compliance 53

Risk Coverage 53

Transparency Issues 54

Infrastructure 54

Labour Costs 55

Overall Competitiveness 56

The Legal System 56

Intellectual Property Protection 57

Bankruptcy and Exit Issues 57

Competition 58

Corporate Governance 58

The Basics of Doing Business 59

Business Relationships 59

Investment Structures 60

Selecting Office or Factory Locations 61

Dealing with Banks 62

Taxation Issues 62

Other Government Incentives 64

Foreign Exchange Regulations 64Environmental Protection Requirements 64

Visa Requirements and Employing Foreign Nationals 65


References and Further Reading 66

Appendix 1 68

Appendix 2 70

CHAPTER 5 THE AUSTRALIA INDIA BUSINESS RELATIONSHIP 71

Australia-India Trade and Investment Opportunities 72

Overall Trends in Australian Exports to India 73Agricultural Exports 73

Wool 73

Cotton 76

Wheat 77

Fruit and Vegetables 77

Resource Exports 79

Coal 79

Metals 81

Elaborately Transformed Manufactures 82


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Services Exports 83

Tourism 84

Education 85

Environmental Services 87Health Services 88

Other Services Exports 89

New Export Horizons for Australia 89

Processed Foods 89

Gas 91

Film Production and Services 92

Australian Investment in India 93

Indian Trade and Investment with Australia 94

Indian Imports into Australia 94

ETMs Dominate Imports 95Indian Investment in Australia 95

Implications for Business 96

References 97

CHAPTER 6 OPPORTUNITIES IN THE NEW ECONOMY 99

Information Technology 100

IT Industry Overview 100

Industry Structure and Growth 100

Software Industry Success Factors 103

Technically Skilled Workforce 104Less Exposure to Key Weaknesses 105

Government Support 105

IT Industrys Future 106

Graduate Availability and Future Prospects 106

The Australia-India IT Relationship 107

Business and Government Links 107

Bilateral Trade 107

Australian IT Investment in India 108

Indian IT Investment in Australia 109

Opportunities 111

Australian Industry Strengths 111

Indian Industry Strengths 112

Assessment 112

The Financial Sector 112

Sector Structure 113

Banking and Finance 113

Insurance 113

Financial Industry Challenges 115

Implications for Australian Investors 116

Telecommunications 116

Overview of the Sector 117


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Telecoms Reforms 117

Announced Future Reforms 118

Telecommunications FDI 118

FDI Limits 119Implications for Australian Investors 119

Health and Education 119

Sector Growth and FDI 119

Health 119

Education 120


Environment 123


Biotechnology 124

Media and Entertainment 125Prospects for New Services Sectors 125

References 126

Appendix 128

CHAPTER 7 OLD ECONOMY PROSPECTS AND OPPORTUNITIES 129

Mining, Oil and Gas 130

Minerals 130

Oil and Gas 131

Foreign Investment 132

Remaining Reform Agenda 134

Opportunities and Prospects 135

Manufacturing 137

Brief Overview 137


Opportunities 140

Infrastructure 141

Brief Overview 141


Opportunities 143

Agriculture and Agribusiness 144Brief Overview 144


Opportunities 145

Implications 146

References 147


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CHAPTER 8 THE STATES PERFORMANCE AND PROSPECTS 149

Indias Diversity 150

Regional Performance Diverging 1501990s Economic Performance 150

Better Places to Do Business 152

Business Surveys Favour High Performing States 152

High Performing States Attracting More Investment and Lending 152

Reasons for Success 152

More Developed Industrial and Services Sectors 154

More Outward Oriented 154

Better Infrastructure than Average 155

Better Fiscal Policies 156

Cultural and Historical Factors 156

New Policy Environment 157

Incentives 157

Policy Reforms 157

Reforming States 158

The Second Tier 158

Prospects and Implications 160

The High Performing States Reform Needs 160


References 162

Appendix 163

CHAPTER 9 IMPLICATIONS 165

Indian Economic Outlook 165

Implications for Business 165

Implications for Government 166

Trade Implications 166

Development Assistance 166

Prospects 167

INFORMATION FOR BUSINESS 169

ALSO BY THE ECONOMIC ANALYTICAL UNIT 171


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E x e c u t i v e S u m m a r y

EXECUTIVE SUMMARY

In the last decade, significant structural reforms helped India become one of the world's fastest

growing emerging economies, boosting living standards and reducing poverty. Economic liberalisation

and rising incomes also stimulated rapid trade growth with Australia and significantly increased

Australia's foreign direct investment in India. India is a big, diverse economy with a current growth

outlook that overshadows most Asian markets. While the pace of growth in the medium to longer

term will depend largely on the speed and extent of ongoing reform, at a time when almost all other

Asian economies are anticipating contraction or slow growth, the Indian market cannot be ignored.

India has already risen from its position as Australia's twenty fifth largest export market a decade

ago, to twelfth largest as we entered the new century. Several fast growing sectors and states provide

increasing opportunities for Australian traders and investors to build on that success.

MACROECONOMY AND REFORMS

An early 1990s balance of payments crisis prompted the Indian Government to undertake significant

reforms; these opened the economy more to international trade and investment, abolished industrial

licensing, floated the exchange rate and increased domestic and foreign private participation in financial

markets. Over the 1990s, these reforms considerably boosted productivity, economic growth and

living standards, reducing poverty and increasing the number of high income consumers.

Since the mid 1990s, a dual economy has been developing in India. Highest growth has been

concentrated in the 'new economy' services sectors like information technology, telecommunications

and finance. Productivity improvement and output growth in many 'old economy' sectors such as

agriculture, infrastructure, mining and to some extent manufacturing has not been as strong. A slower

pace of reform in the second half of the 1990s has meant that some key reforms required to boost

growth further in these sectors have yet to take place. Despite a slowing in average annual real GDP

growth from over 7 per cent in the mid 1990s to between 5 and 6 per cent in recent years, a group of

four more outward oriented states in the south and west of the country, Gujarat, Karnataka,

Maharashtra and Tamil Nadu, are growing more strongly than the rest of India due to a concentration

of new services sector industries in those states. Looking forward, these 'new economy' sectors and

high performing states should continue to grow at above average levels.

The report considers three potential future growth scenarios. Comprehensive fiscal, labour market,

trade, foreign investment, privatisation and government administration reforms could see India return

to previous real GDP growth peaks of 7 to 8 per cent per year or exceed them. However, rapid reform

is unlikely due to sectional interests resistance to reform; in Indias large decentralised democracy,

achieving consensus is difficult. The most likely scenario is continued incremental reform, as experienced

in the past few years. Together with reforms achieved to date, this could sustain growth averaging5to6 per cent in the short to medium term. This is in line with Consensus Economics' real GDP

growth forecasts, which rate India and China as the two highest growth major Asian economies.


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However, a third less probable scenario is possible if significant fiscal and infrastructure shortfalls become

more serious and reforms stall; this could see medium term growth dip to 3 to 4 per cent or lower. The

current disruption to Parliaments passage of the Governments needed reform legislation increases

the risk of this third scenario; however, the most likely scenario remains continued incremental reform

over the medium term.

TRADE

In the 1990s, trade reform was Indias most substantial and successful area of economic reform. The

Government removed quantitative restrictions on imports, lowered average import tariffs significantly,

floated the exchange rate and reduced controls on exports. In response, exports and imports expanded

more quickly and the Indian economy is now far more integrated into the international trading systemthan previously. Opening the economy contributed to gains in productivity and competitiveness and

Indian exports now constitute a much higher share of world trade.

Despite these important reforms, restrictions on trade remain. Tariffs are still high by regional standards

and have recently increased again in weighted average terms. Also, controls continue on a variety of

imports, some export restrictions remain in place and business finds customs procedures challenging

to navigate. Hence, successful exporting and importing often requires considerable time, effort and

investment. Nevertheless, the previously protected nature of many markets means Australian exporters

opportunities should increase as import barriers decline. The launching of a new WTO round at Doha

in November 2001 augurs well for further reductions in import barriers and an expansion of trading

opportunities in the Indian market.

FOREIGN INVESTMENT

Since the early 1990s, India has significantly reduced its controls on foreign investment; FDI surged

from low levels as a result. Large parts of the economy are now open to some level of foreign participation,

although many sectors still permit less than 100 per cent foreign ownership. Initially, FDIflows

responded to the opening of a large new market which had been protected for several decades, often

motivated by a desire to avoid Indias high tariff walls. However, over the past five years or so, fast

growing new economy services sectors, particularly the information technology, IT, industry and

several high performing states are attracting increasing foreign investor interest. Most IT firms supply

export markets. The challenging business environment and policy restrictions currently constrain

sustained inflows into agriculture and to a lesser extent infrastructure, manufacturing and mining.

Due to recent liberalisation, mining, infrastructure areas like ports and niche manufacturing, particularly

of high value added products, offer good potential investment opportunities. Australian businesses

could benefit from investigating investment opportunities in these sectors and fast growing regions.


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THE BUSINESS ENVIRONMENT

Many Australian and other foreign companies successfully trade and invest in India. Growing incomes

expanding the middle class, gradual liberalisation of the economy, generally low labour costs and the

widespread use of English are some major attractors. Despite reforms over the last decade, companies

doing business in India face considerable challenges; however, for those who do succeed, returns

can be high. Infrastructure, which is in short supply and expensive by regional standards, is a major

problem for business. Red tape and transparency issues are significant, intellectual property protection

is limited and the court system is pressured by a large backlog of cases. However, a good local

partner can assist business in dealings with government and other regulatory bodies, along with

facilitating market access. Thorough due diligence is needed before selecting business partners,

agents and associates. While India remains a challenging place in which to do business, profitableopportunities exist for experienced and informed traders and investors.

THE AUSTRALIA-INDIA BUSINESS RELATIONSHIP

India accounts for only 1.6 per cent of Australias merchandise exports, but in the decade to 2000,

Australian exports to India increased by 12 per cent per year and India moved from Australias twenty

fifth to twelfth largest export destination. Resource exports, especially coal and metal products,

dominate Australias exports. Continued liberalisation of the Indian economy will increase opportunities

for exports of Australian commodities and some niche, often advanced technology, manufactures.Service exports like tourism and education also are growing strongly.

While Australian direct investment in India increased substantially during the 1990s, at about A$1 billion,

its Indian investment stock is still well under 1 per cent of Australias total overseas direct investment.

Faster growing service sectors, including IT, media and finance, mining and niche manufacturing are

the main areas attracting recent Australian investor interest.

NEW ECONOMY OPPORTUNITIES

In future, these fast growing new economy sectors, including information technology, IT, finance,

telecommunications, health, education, environmental services, biotechnology and media and

entertainment increasingly should offer attractive direct investment opportunities. In particular, the

Indian IT sector is flourishing due to its strong comparative advantage in relatively low cost skilled IT

engineers and supportive government policy. Significant opportunities exist for Australian firms to

enhance competitiveness through direct investment in and outsourcing to the Indian IT sector.

The financial sector is increasingly open to foreign investment and growing strongly. Although the

sector remains constrained by a strong public presence, overstaffing and high non performing asset

levels, the Government is working to address these issues. Nevertheless, intending investors needto be well prepared and may find the best opportunities lie in partnering with recent private Indian

entrants to these sectors.


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The telecommunications sector also is growing strongly. In the past, frequent policy changes made

this a challenging sector to enter; however, recent reforms promise better opportunities for private

companies to compete with public incumbents and foreign investor interest in this sector is increasing

again. Health, education, biotechnology, environmental services and media and entertainment also

are sectors where recent gradual liberalisations and stronger market growth should allow Australian

firms with strong capabilities in these sectors to invest profitably; several Australian educational

institutions and other companies already participate successfully in these sectors.

OLD ECONOMY OPPORTUNITIES

Among the old economy sectors, manufacturing, mining, infrastructure and agriculture, mining

currently is the most prospective for Australian firms. Recently, several progressive states have issuedmore mining prospecting leases, significantly increasing Australian miners interest in this sector.

Fiscal regimes for mining also are approaching international standards, while oil and gas could offer

medium term opportunities.

While sectors like manufacturing, infrastructure and agriculture are slowly opening to foreign direct

investment, foreign ownership caps, infrastructure shortages and government regulation of private

sector activity in these sectors has kept foreign investment to modest levels. Nevertheless, several

Australian firms are succeeding in the manufacturing sector, usually by bringing high technology

processes, skills and products to India. Furthermore, good opportunities exist in private ports and aid

funded road projects; at present, these are the most prospective infrastructure sectors for investors

and goods and service exporters. In most other old economy sectors, significant opportunities remain

contingent on further policy liberalisation and an improving business environment.

THE STATES

Culturally, linguistically and economically, India has always been a highly diverse country. Economic

divergence widened in the 1990s, when four southern and western states, Gujarat, Karnataka,

Maharashtra and Tamil Nadu, achieved significantly stronger real GDP and per capita income growth

than other major Indian states. These high performing states excelled because economic reforms

most benefited industry and services in which they specialise; they also are more outward oriented

and, in most cases, have better infrastructure endowments. A strong historical focus on education

and business and some state policy reforms also assisted their performance. Australian businesses

could benefit from this regional divergence by focusing their efforts on those states that are performing

better, have better business environments and higher and faster growing incomes; these may offer

investors and traders more opportunities.


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IMPLICATIONS

Indias reforms are creating relevant trade and investment opportunities for Australian firms in a range

of fast growing new economy sectors and high performing states; as well, higher incomes and trade

liberalisation are boosting Australian commodity, niche manufactures and services exports to India.

Further comprehensive reforms would consolidate growth and expand these opportunities further.

In the short to medium term, Australian businesses operating in India can expect incremental reforms

to continue; in the short term, more comprehensive reform is unlikely given political constraints faced

by the central coalition government. Major changes to the business environment also are unlikely in

the short to medium term, though some states gradually are reducing red tape and increasing labour

market flexibility. Infrastructure shortages are likely to remain acute for some time.

Three key messages to emerge from case studies of Australian firms doing business in India are:

the crucial nature of business partner choices

the need for patience and perseverance in dealing with the bureaucracy

the good sales growth prospects for firms which succeed on these first two issues and have a

well priced or unique commodity, service or product to sell.

India and Australia increasingly recognise they share many common trade and political objectives.

Shared trade reform issues include trade in information technology, e-commerce issues, and services

negotiations in the WTO. As a large agricultural producer embarking on a process of economic reform

and opening, India shares many concerns in common with the Cairns Group of agricultural exporting

nations, which Australia heads. Liaison between Australia and India already is well established, and

prospects for further development in this relationship are promising. Sharing common democratic

ideals and Commonwealth membership, India and Australia also are leading members of the Indian

Ocean Rim Association for Regional Cooperation.

As Indias reforms deepen, its growth potential is huge. Already Australian businesses are developing

many trade and investment opportunities in India and prospects for bilateral commercial relations

are bright.


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