India’s economy will expand at a rate of 7.75 percent between 2015 and 2020, the fastest growth rate among major emerging markets. As India becomes an increasingly attractive market for multinational companies, FSG’s base-case scenario foresees a steady rate of growth—driven primarily by consumption—as well as several important, underlying themes that companies need to take into consideration when building their long-term India strategy.

Slow progress in executing structural reform from the central government will encourage states to implement individual reform. Progressive states will ease procedures and improve incentives for industry in a bid to attract investment. These nuanced changes are critical to India’s growth and warrant a deeper understanding. To help illustrate these concepts, I have highlighted several important qualitative themes that will define India’s future and have separated them into opportunities, mixed blessings and challenges below:

Opportunities

• Urban India: The development of 100 smart cities and the rise of Tier-2 and Tier-3 cities in India are likely to increase India’s urban population from the current 32 percent to more than 50 percent by 2050. Additionally, India’s demographic dividend, or the large pool of young workers, remains the most attractive characteristic of the economy. As more young people enter the workforce, average incomes will rise, leading to increased consumption and spending power. Companies should study consumer preferences as urbanization and increasing consumption power make the Indian market more attractive.

• Cluster India: High transport and energy costs and lack of last-mile connectivity hinder market penetration in India. Increasing government attention and public-private partnerships (PPPs) for the development of roads, ports and airports, and railways in and around industry clusters will help improve market access and reduce costs.
• Tax-efficient India: The Goods and Services Tax (GST) will ease procedures and have significant implications for supply chain management in India. The new tax regime will unify the Indian market, allowing companies to make decisions based on commercial viability rather than tax efficiency.
• Manufacturing India: Improving policy support through the “Make in India” campaign along with natural advantages, including low costs and a large domestic market, make India’s manufacturing sector increasingly competitive. The sector is likely to see increased output, contributing 19 percent of GDP in 2020 (up from 17 percent in 2015). Consider manufacturing in India (client-only download) for local consumption and exports.

Mixed blessings

• Federal India: The central government is encouraging states to compete for resources on the basis of economic policy and ease of procedures. This tactic, if successful, will encourage states to prioritize sound economic policy and attract investment. If unsuccessful, however, states could use the increased resources for unproductive spending. Companies should study state-level incentives that are encouraging industry and cluster development.
• Land-rich India: A complex land acquisition process in India hinders development of industry and infrastructure. The central government is likely to allow states to go ahead with individual land reform, a politically sensitive subject. States like Gujarat have already differentiated themselves on land policy. Others will focus on simplifying procedures, using single window clearances and transparent pricing mechanisms. Companies should monitor progress made by different states on land reform.

Challenges

• Competitive India: Local competition has intensified in India with many domestic companies taking advantage of Indian consumers’ price sensitivity. Local companies also have detailed knowledge of the market. Companies should use FSG’s “Four P’s” framework to mitigate the threat of competition, focusing on Partnerships (B2B), Process (B2B), Product (B2C) and Positioning (B2C) strategies.
• Bureaucratic India: India remains one of the most difficult countries to do business in, ranking 142 out of 189 countries in the World Bank’s Ease of Doing Business Index. Companies should track changes in the regulatory environment—at the central and state levels—to be aware of changing procedures.
• Labor-restricted India: Complex labor laws make it difficult for multinationals to capitalize on production economies of scale. Some states like Rajasthan have implemented flexible labor laws in order to attract industry. Multinationals should consider reallocating resources to more progressive states that are likely to implement similar reforms.

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