Emerging Markets Insights

India’s budget does not propose any grand plans or major reforms, disappointing several groups that expected the finance minister to combat decade-low growth with a radical plan. However, multinationals have welcomed the realistic and well-balanced strategy

FSG View:

Relatively Neutral Budget:

• Given the historical trend of overpromising and under-delivering, India’s newly appointed Finance Minister P. Chidambaram has set the budget for a relatively neutral course with no radical proposals, focused around increasing the planned spending, cutting down on subsidies, and encouraging investment

Increase in Planned Spending:

• Companies should be encouraged by the government’s plan to increase the size of their overall expenditure by 16.4%, the majority of which will come from an increase in planned outlay, while reducing non-planned spending, which entails interest payments, subsidies, and defense

Decrease in Subsidies Bill Difficult:

• Subsidy cuts during a pre-election year are going to be difficult, but the government expects cuts in its petroleum expenditure. Last year, the government’s subsidy target was 1.9% of GDP but the revised estimates are over 2.5%

Historical Trend:

Overpromising and Under-delivering:

• The Congress Party Government has consistently set unrealistic targets in a bid to keep voter confidence high; a maneuver that was not given much importance during the days of high-growth, but one which could backfire given the current slowdown
• With the general elections coming-up in 2014, the government’s actions and performance are likely to receive closer scrutiny from both voters and the private sector

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In this podcast, Frontier Strategy Group Expert Adviser Brandi Moore shares her expertise on building a strong culture of innovation in emerging markets. In the business press, stories of successful emerging markets-led innovation from companies like GE and Unilever dominate headlines, but most companies struggle to achieve similar results. Brandi shares her view on why, and offers practical solutions.

To listen to or download the podcast, click on this link to access the iTunes store.

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Brandi Moore has been solving challenging business problems in India since 2004.  She has worked in India with Wipro, Infosys and other top outsourcers building processes to span learning gaps between Indian concepts and Western business models.  She has extensive experience developing methodologies for US executives managing Indian employees, leading India-based projects and negotiating with Indian executives.

Brandi has negotiated with foreign governments, large corporations and inside India with stakes as high as $200 million.  She is trained in the 5-D Hofstede model and executes negotiations based on culture as well as formal negotiation strategy.

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In this podcast, Frontier Strategy Group’s lead India analyst, Shishir Sinha, shares his view on India’s latest reform efforts. Although some progress has been made, many of the most important reforms for multinational businesses remain undone.

To listen to or download the podcast, click on this link to access the iTunes store.

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1. Fragmentation:

Multinationals have to move out of the traditional Tier-1 cities in order to adapt to India’s unique urbanization trend:

The rise of manufacturing in rural India has led to robust job and wealth growth, which means a lot of the rural population, is not interested in moving to large-cities but instead, we can expect small villages to turn in to small towns, then big towns and eventually into large cities. This means that as a multinational- you will have to go to your end customers, and not the other way around- waiting for them to come to the traditional metro cities

Towns simply grow into densely populated cities, as opposed to a conventional migration of people from towns to cities

Expenditure on durable goods, education, consumer services (entertainment, transport, etc.), and fuel have grown faster than the average over the last 10 years

2.  Infrastructure Issues:

India’s consistent underinvestment in infrastructure, lack of regulatory reforms, and generally unstructured style of conducting business adds an additional layer of complexity for multinationals operating in the country:

Stay tuned for the next blog-post on distributor sophistication in India and FSG’s assessment criteria to identity gaps in your channel strategy

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Companies should monitor the following areas to determine where India is headed:

1.       Interest Rate Cuts – One of the reasons we saw a small uptick in growth is because interest rates were cut in April which definitely impacted Q2 numbers. We need to see if the central bank is going to cut the interest rate again – if it does then we can expect growth to be higher than 5.5% for H2 2012

2.       Inflation – While headline and non-food inflation have fallen, retail (and food) inflation remain at stubbornly high levels for now. That is one of the reasons the central bank has been hesitant to cut any rates. Food inflation is a structural issue in India – a supply side issue caused by lack of infrastructure that leads to about 30-40% of all fruits and vegetables to rot in inadequate storage facilities- so until this is completely fixed – cutting interest rates is not really going to do much good

3.       Parliamentary Debates on Reform – This is extremely important. We need the politicians to begin to restart conversations on the many bills that are surrounding several of the reforms (including land-reform, tax reform, multibrand reform) etc. A new corruption scandal has not led to any real debate taking place in the parliament which means that true reforms are likely to be delayed further – so we can’t expect a full recovery until that happens

4.       Exports – While the rupee has fallen in value, so has demand from the west – so we need to understand whether or not exports are truly doing better – and for that – we need to wait for more detailed numbers. If export picks up, there might be some small relief but one has to keep in mind that India’s GDP is mostly based on domestic consumption (almost 60% of it)

5.      Monsoon – If monsoons turn out to be horrible – we will see the agricultural sector suffer and that will have a further negative impact on the growth figures

Overall I would say that since the GDP growth for H1 is around 5.4%, these are some of the things that need to happen:

1.       In order to meet the government target of 6.7% growth = India needs Q3 and Q4 to see growth of 8% – I highly doubt this will happen

2.       In order to meet the central bank target of 6.5% growth = India needs Q3 and Q4 to see growth of 7.6% – tough but possible

3.       In order to meet the FSG target of 6.3% growth = India needs Q3 and Q4 to see growth of 7.2% – tough but possible

Is the worst over? Assuming nothing changes from now until December, I personally expect India to see growth of 5.3-6% for the year so Q3-Q4 numbers need to be in the range of 5.8-6.3% – so yes they might be better but still VERY weak (given that a year ago, we saw GDP grow at 9%)

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Infrastructure is the top barrier for multinationals in rural India

• The slow rate of reform and the country’s vastness means that companies wanting a share of this high-growth market need to employ cost-effective and innovative supply chain techniques
• A recent survey revealed that ‘inadequate infrastructure’ is the number one barrier for multinationals in terms of expanding into India’s growing rural market
• Moreover, it was also found that respondents believe that ‘supply chain and distribution efficiency’ are the key imperatives for profitable and sustainable growth in Indian rural markets
• Road construction and electrification are rapidly increasing in rural India, but these projects are often slowed due to high amounts of corruption and bureaucracy

FSG View:  Multi-Layered Distribution Channel Network Ideal for Penetrating the Indian Rural Market

• Multinationals need to create a network of trusted distributors in order to reach the nooks and corners of a highly scattered rural setting
• Companies cannot use the conventional distribution model used in urban settings, by which products go from the factory to retailers or wholesalers. The model is obsolete due to the vastness of the country and the 638,000 villages scattered across it
• In order to reach the smaller villages while keeping costs low, companies need to use a series of large local distributors who in turn have access to the smaller distributors and wholesalers (see graphic for explanation)
• They should expect to monitor a complex system that involves multiple transactions and a large number of stakeholders

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Frontier Strategy Group Expert Adviser, David Wolf recently wrote the following on his Silicon Hutong blog:

While the Fourth BRICS (Brazil, Russia, India, China, and South Africa) summit was nearly three months ago, the meta-message that is emerging from the aftermath is that these countries do not yet form anything resembling a bloc of interests.

Ruchita Beri’s short piece (linked above) is guardedly optimistic about the grouping, but if you read between the lines you can almost feel the divergence of interests that is pulling this grouping apart. Beri, a senior researcher at India’s Institute for Defence Studies and Analyses, gently suggests that China is part of the problem.

“While the BRICS grouping does provide an opportunity for each member to play an important role on the global stage, one of the challenges that it faces is cohesiveness. Take the issue of the BRICS development bank. While it is indeed a laudable initiative, the challenge lies in aligning the differing interests of the member countries. Moreover, other members of the grouping are wary of China’s domination over the bank given that China holds very large foreign exchange reserves ($ 3 trillion).”

All of this serves to underscore the real elephant in the room, which is the fact that while some of the BRICS might trust each other, most are having a hard time trusting China. As it considers its soft power challenges, China also needs to see that being a trustworthy player in the global system would do a lot toward making it influential (rather than disruptive) in such international groupings, and in turn toward making those groupings influential.

To view the original post, click here.

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The India government has proposed the launch of the landmark Goods and Services Tax (GST) bill during H2 2012 in order to reduce the compliance burden for companies and meet international consumption tax standards

• With the law meeting international standards and signaling the government’s attempts to simplify the process of doing business in India, FDI is expected to rise as well
• Initial studies show that it will add about 1.5% to the GDP due to the lower compliance burden, more competitive exports, and higher tax revenues

Frontier Strategy Group View:

Companies can expect the law to be delayed due to the bargaining that will take place between the state and central governments in terms of revenue sharing and level setting

The 28 state governments have vastly differing interests; those with higher revenues are more unlikely to share their wealth with the central government (see map below)

While the reform is headed in the right direction, companies will bear the cost of inefficient resource allocation and more expensive logistics as the differing state GSTs will continue to divide the Indian market into several sub-markets.

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India’s quarterly growth hit a near-decade low during Q1 2012. Companies need to wake up to the new reality and plan for a slowing macroeconomic environment in Asia’s third largest economy.

Companies need to immediately start evaluating how major aspects of their business are going to be impacted by India’s deteriorating fiscal and monetary conditions, which are caught in a vicious downward spiral.

Understanding The Downward Spiral

India is caught in a vicious cycle of domestic fiscal and monetary issues stemming from its strong populist agenda. Results so far include a weaker rupee, more expensive oil, higher inflation, and a possible decrease in the country’s international credit rating

Evaluating Impact on Your Business Value Chain

Companies should create an impact matrix to evaluate how individual macroeconomic drivers will impact their business activities. The impact matrix should scrutinize every step of the value chain from lending availability to machinery import, consumer demand, and overall ease of doing business.

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Frontier Strategy Group’s research has found that Multinational companies across Asia use a wide variety of channels to influence government policy as differing political systems and cultural norms demand unique strategies to manage domestic government engagement.    

1. Effective Channels For Influencing Government Policy

Companies across China, India, and S.E. Asia find local industry organizations, chambers of commerce, and external government affairs agencies to be the three most effective channels for influencing government policy

2. Top Choice For Influencing Government Policy

Local industry organizations are also the first choice for more than 40% of the respondents for influencing government policy across all regions

Interestingly, India is the only region in which engaging external government affairs agencies is a top choice for influencing public policy. Handling India’s political complexities and unreceptive government officials requires strong local connections that government affairs agencies are able to manage effectively

In China, engaging business partners to influence public policy is considered highly effective due to the strong relationship between the government and the private sector. This is not surprising because “guan xi” (relationship ties) play a very important role in gaining access to policy makers thus influencing their decisions

*Shishir Sinha contributed to this post

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