29 Dec 14 Seven reasons why companies should (must?) invest in India

For multinational corporations, India has not been an easy market to do business in – especially over the past few years. What with laws changing frequently, aggressive and unpredictable tax demands, resource constraints (especially land), infrastructure bottlenecks, business unfriendly bureaucracy and rules – many foreigners (and even Indians) are frustrated and discouraged from investing in India.

In recent months, there has been renewed hope due to a new government. However, this has also led to some unrealistic expectations. Things may not happen as quickly as many expect, and several reforms may be delayed or de-railed by vested interests.

If so, then why do I think corporations should (indeed, must!) invest in India? Here are some good, long-term reasons.

Paradigm shift in political discourse

This is not only about Mr. Narendra Modi’s win, but some of the underlying factors that have driven the election victory. Most fundamentally, this election was fought on the agenda of development – not subsidies, or caste, or welfare for the poor, or any other socialistic theme. The fact that issues like development, jobs and governance, resonated so strongly with India’s voters marks a big shift. No government in future will be able to ignore the development agenda, and that augurs extremely well for the long term.

Demographics

Economists have long correlated a young population with long-term growth potential. India is young – more than 50% of Indians are below 25 years. While this point has been repeated ad nauseam, it still remains a crucial fact. Apart from the availability of a young workforce (and consuming population), it is the aspirations of the youth, fed by (almost) ubiquitous media access that has changed the political discourse, and will continue to drive positive change.

Sustained growth…

Despite all the problems we’ve had in recent years and the impact of the global financial crisis (and all the negative press), India’s GDP growth has been > 7% per year (on average) over the past decade. There is no reason why similar growth rates cannot be maintained over the next couple of decades.

Too large a market to ignore

The sustained growth of an already decent-sized economy will make India one of the largest markets by 2030, and even more so by 2050. Back in 2004, Goldman Sachs made headlines with their famous BRICS report, which predicted that India would be the 3^rd largest economy by 2030. Nothing has happened to change this conclusion, and a recent PwC report draws very similar conclusions. No major (or even minor) multinational corporation can afford to ignore a market that is going to be so large.

Rapid Urbanization

A rapidly urbanizing population will ensure that consumption driven demand stays robust for a long time to come. In the next couple of decades, India will add somewhere close to 300 million urban dwellers.

Democracy and Institutions

However much we may admire the Chinese growth story, and contrast it with the bumbling Indian state, democracy does have several advantages. The pulls and pressures of an open political system, a free media and independent institutions (however creaky and inefficient); may make for slow decision making and short-term growth constraints. At the same time, this also ensures that the country does not experience the turbulent upheavals that can be caused by centralized political power, or shifts in power.

Equally important – the freedom and democracy have helped create a vibrant entrepreneurial (risk-taking) culture. A free media has meant that Indian workers are more attuned to global trends than they might have otherwise been.

Fragmented and inefficient markets

Fragmented markets with umpteen small players provide plenty of room for consolidation and ensuing benefits of scale. In almost all sectors, there are plenty of efficiency gains that can prove to be low-hanging fruit. The large number of small Indian companies also provide for interesting inorganic growth options.

India is not a market that will yield quick returns. It’s complex, difficult, diverse – but with enormous potential. Unlike portfolio investors or hedge funds, corporations can (and must) take a longer term view. The sooner they dip their toes in, the sooner they build local knowledge and learn to manage the complexities and contradictions. Think 25 years ahead, and don’t worry too much about the next few years!