Turbocharged India on way to overtaking the US economy
By Mark Kleinman, Asia Business Editor
Last Updated: 1:31am BST 08/05/2007
Supper time in the plush New Delhi residence of the British High Commissioner, Sir Michael Arthur, last Monday evening, saw something unusual on the menu: Weetabix. Executives from the food company drank tea with Indian health experts to mark the launch of Britain's most famous breakfast cereal into India's 40 biggest cities.
The event underlined in its relatively modest way the same point as that made by Vodafone's recent £5.5bn takeover of Hutchison Essar - India is booming.
"We are aiming at a 10pc market share in 2009," said Andy Harris, international commercial manager at Weetabix. "There is a new middle class of 140 million people, so there is big growth potential."
The excitement is not limited to foreign food manufacturers. From property and consumer goods to the burgeoning outsourcing and Bollywood film industries, India is experiencing a surge that Goldman Sachs, the investment bank, has predicted will see it overtake the US as the world's second-largest economy by 2042.
GDP growth lags only that of India's Asian neighbour, China, among major economies and it has a middle class that each year is growing at a rate equivalent to the population of Holland. Only last week, McKinsey, the management consultancy, published a report suggesting that India will become the world's fifth-biggest consumer market in less than 20 years.
"Barring exogenous shocks, we are fairly certain that the economy will grow by at least 8pc [this year]," the Indian finance minister, P Chidambaram, told a conference in Hong Kong a few weeks ago.
On the face of it, the outlook is almost blindingly bright, for foreign and domestic investors alike. Indian companies are expanding on to the global stage as never before. Tata Steel's takeover of the Anglo-Dutch steelmaker, Corus, for £6.7bn was the largest foreign takeover by an Indian enterprise, backed by the country's highest-ever corporate loan. Since then, other notable cross-border transactions have followed, including the $6bn (£3bn) acquisition of Novelis, a Canadian aluminium firm, by Hindalco, a major Indian player in the sector.
According to Dealogic, the financial data provider, cross-border transactions involving Indian companies have already reached $33.5bn this year, more than the total for 2006, which was itself a record. "India is on turbo-charge," said Lord Bilimoria, founder and chief executive of Cobra Beer, which saw consumption in India rocket 600pc during a six-month period last year.
Meanwhile, corporate earnings are up, the Bombay exchange's benchmark Sensex index has soared to record levels and the country's core industrial base is expanding into areas once outside India's natural domain. These include large-scale car manufacturing, through joint ventures with the likes of Fiat and General Motors.
"It is our intention to make India a manufacturing hub," said Mr Chidambaram. "We are already a top-three country in a dozen manufacturing sectors, such as petrol refining, steel, automotive parts, leather and textiles."
For British investors in India, manufacturing has taken second place to financial services, where Aviva, Prudential and Standard Chartered have all placed big bets on the country's growth prospects. Consumer goods companies, such as Scottish & Newcastle and Unilever, have also been trying to tap the emerging middle classes.
"The outward-looking face of India has been the biggest change [since the country's liberalisation], as opposed to the old insular, protected attitude," said Lord Bilimoria, who also serves as UK chairman of the Indo-British Partnership Network, established in 1993 to strengthen business links between the two countries.
Bilateral trade between Britain and India doubled between 1995 and 2005 - the latest year for which full figures are available - to £7.9bn, but while the overall value of trade is increasing, Britain's share of the Indian market is in decline. In 1991, when the process of liberalising the Indian economy began, Britain's market share of Indian imports was about 14pc but by 2005, that had reduced to a little more than 2.5pc.
Many British companies "already have an Indianised presence" as a result of historical colonial links, said Andrew Cahn, chief executive of UK Trade & Investment.
As Britain's share of India's foreign trade shrinks, competitors from Europe, Asia and North and the Americas are rushing in. "It is going to be a very fruitful place for foreigners to do business," said Mr Cahn. "Key factors are the pace of liberalisation and the confidence with which India embraces globalisation. It is said that the IT outsourcing industry grew so rapidly partly because the government did not realise it was happening."
The government's stance on foreign direct investment laws has often appeared ambivalent, with ownership laws establishing barriers to foreign takeovers and joint ventures in sectors such as insurance and retail. But with so much outbound M&A activity, most people expect the government to relax those barriers in the medium term - and overseas retail giants such as Wal-Mart, Tesco and Kingfisher are keen to pounce.
"One advantage India has is that it is not wholly reliant on
re-exporting, unlike China. Much of the investment going into the country is for domestic supply as well as other markets," said Mr Cahn. "The demographics, with a very young and increasingly educated population, are right for sustained growth."
But there is another side to the story. The soaring growth rates and influx of foreign capital cannot conceal the fact that India barely functions at all. As any visitor to one of the country's major business centres, such as Bangalore, Delhi or Mumbai, will testify, the infrastructure is creaking.
The government estimates that at least $350bn is required to upgrade the roads, airports and utilities networks that India requires if it is to thrive, but even that figure is dismissed as conservative by some.
There are other issues for the government to grapple with, including a relentless battle with inflation and the endemic poverty which means that 300 million Indians are still forced to survive on less than a dollar a day. A looming skills shortage is also causing headaches, with Nasscom, an IT industry body, predicting a shortfall of half a million Indian professionals in the IT sector by 2010.
So far, the Indian juggernaut is rolling on regardless, and overseas private-equity money from the likes of 3i and Blackstone should provide some much-needed assistance to bridge the gaping infrastructure deficit. Without it, India will need more than Weetabix to fuel its journey towards becoming a genuine economic superpower.
