India: Has its time finally come? Many economists think so

Many economists think so. And yet India remains one of the world's most complicated markets—and a place fraught with challenges for international businesses.

Had it not been for civil unrest, Hervé Collet would have been on a plane to the remote city of Jorhat. As the general manager in India for a junior oil exploration firm, Calgary-based Canoro Resources Ltd., the affable, big man had planned to visit the company's exploration block and a partly developed property in the eastern province of Assam. But the United Liberation Front of Assam, one of several dissident groups active in the area, called a bandh (general strike) and shut down the province–a not uncommon occurrence. So, on an evening in early April, he found himself at a restaurant in New Delhi talking to me. “It's announced in the papers,” Collet said of the bandh. “Everybody knows. Shopkeepers will not open their shops. Nobody works. There's no transportation. There's no nothing.”

Collet didn't seem upset at the inconvenience; after all, he was accustomed to working in distant lands. His lifelong oilpatch career had taken him to Kazakhstan, Libya, the North Sea, Yemen, China, Nigeria, Mexico. Oil, he pointed out to me, isn't always found in lands with paved roads and antiseptic sanitation systems. Over dinner, he rhymed off dozens of challenges of doing business in India–from inter-provincial tariffs to being forced to shut down the office due to power outages. But he invariably finished by shrugging them off. “That's the way it is,” he repeated, in his gravelly baritone. After 10 months of working in India, Collet concluded that the country was a hard place to hunt for oil. “It's the bureaucracy,” he said. “It's really stifling. Basically, they've taken the British bureaucracy–which is famous–and they've multiplied it for one billion people.” The fact that Mani Shankar Aiyar, India's minister of petroleum and natural gas, believes the sector is the “most liberalized and globalized” in the country may only serve to demonstrate how difficult westerners will find doing business here.

And yet India has seized the imaginations of international companies and investors. It emerged first as an information technology powerhouse, but now foreign companies are flocking there to capitalize on all sorts of perceived opportunities. Insurance. Oil and gas. Consumer products. India has changed from a land regarded with indifference to a land of opportunity, virtually overnight.

If all of this seems alluring, consider Collet your cold-water guy. “India's not for the faint of heart, at least not from what I've seen,” he said. “It's a Third World country, with all that entails.”

April 17 was the 225th anniversary of the birth of Bhagwan Swaminarayan, founder of a Hindu sect that claims a million members. An estimated 26,000 people celebrated in the 41¼ C heat as darkness fell on Ahmadabad, capital of the province of Gujarat. Children acted out folk tales, monks sang Sanskrit songs, and speakers railed against greed. In the crowd was Vivek Jivan Das, a saffron-robed sadhu, or monk. Das was born in East Africa, raised and educated in England. At 20, while studying biochemistry in London, he took a vow of humility and celibacy, and renounced family for the monastic life. That was in 1976, and he hasn't looked back. “I feel very happy,” he says. “There is no question of any regret at all.”

Meeting people like Das is part of the quintessential Indian experience, but in his renunciation of the material world he is an exception to the rule. In the book Being Indian, former diplomat Pavan Varma wrote that his countrymen project themselves as eschewing the pursuit of wealth and power. “The image is a myth,” Varma continued. “Indians have always had a down-to-earth relish for the materialistic world.”

Such appetites are attracting international companies that hope to sell goods and services in a market of 1.1 billion people, a growing number of them middle-class. And consumers are in a spending mood. ACNielsen recently ranked Indians at the top of a global list of consumer confidence. They've also discovered plastic. “Historically, it's not been a society that's lived on credit,” says Rajiv Mathur, a partner with Deloitte & Touche in Toronto. “Consumer credit is going through a major boom. That in itself will lead people to buy consumer products.”

India has long had qualities that should make it attractive to business people. For starters, most business there is conducted in English. It's a democracy. The legal system may be clogged, but at least it is based on familiar principles and protects property rights. India's primary schools are generally abysmal, but the country is home to some of the world's leading universities and technical colleges. It also has a free press and a relatively sound banking system. The capital markets are well developed–India has had a stock market for 130 years.

For most of the years since India obtained independence, in 1947, however, all that was not enough to attract international business. Founding prime minister Jawaharlal Nehru had intended to rectify the colonial legacies of rural feudalism and deindustrialization. But India's socialist experiment instead has been widely blamed for stunting growth. In the three decades after independence, GDP grew by an average of about 4% annually, while the population grew more than 2% a year. Massive, regulated companies dominated, and were protected from foreign competitors. Corruption was rampant. Even if foreigners wanted to brave this bleak climate, they were often not allowed.

India's renaissance is typically dated from 1991, when the government came to the brink of defaulting on its foreign debt. That year, a new administration, headed by Narasimha Rao, embarked on a series of reforms. Government control and planning were reduced, trade barriers dismantled, foreign investment policies liberalized, fiscal deficits slashed. The results: exports improved, India's debt burden decreased, and the corporate sector became more cost competitive.

By 1997, the Economist magazine could still call India “a barely qualified economic failure.” But that was before it established itself as the world's back office. From virtually nothing, its IT sector surged during the late 1990s, reaching growth rates of more than 50% per year. World-class companies like Infosys Technologies and Wipro Technologies emerged. Soon, India became a destination for technical support, call centres and back-office processing, because it offered an unbeatable combination: world-class work at Indian prices.

Encouraged by the success of the IT industry, some believe India's moment has arrived. The enthusiasm is occurring at a time when many other economies are expected to cool. Allan Seychuk, an economist with RBC Financial Group in Toronto, says the United States is becoming an expensive market for Canadian exports due to exchange rates. And while Japan, the U.S., much of Europe, and Canada struggle with aging populations, India is entering a cycle where a large portion of its people will be of working age. “Traditional markets are shrinking and becoming more challenging,” says Seychuk, “so now's the time to look to new markets that are aggressively expanding.”

Surjit Bhalla is optimistic, too. An economist who worked for the World Bank, Goldman Sachs and Deutsche Bank before setting up his own hedge fund firm, Delhi-based Oxus Research and Investments, in 1996, Bhalla says India has made great strides in reducing poverty, and a remarkable decrease in the cost of capital, coupled with the government's relaxing of control over interest rates, bodes well for the future. “Only in the last four to five years have we become a rather attractive place to be,” he says. “Is this interest justified? The answer, in a word, is yes.”

A trip through any large Indian city can be jarring. At some congested intersections, lepers, eunuchs and mothers carrying naked babies line up at car windows asking for change. Children with gross deformities push themselves down the street on small carts. More than 25% of Indians live below the poverty line. “There are islands of excellence, like information technology experts, amidst a sea of deprivation and misery,” wrote economist Y. V. Reddy in 2002.

Nothing is inevitable about India's emergence as a global economic force. “There's many a man and woman found six feet under because they bet on India doing the right thing,” Bhalla acknowledges. Consider that just one million Indians work in the IT industry. Much of heavy industry remains moribund. India is behind China, to which it is often compared, in terms of exports, foreign direct investment, and a host of other benchmarks; many like to say that India's economic development trails China's by at least a decade.

One problem is infrastructure. Sports cars and transport trucks share highways with ox-drawn carts–hardly a recipe for fast-moving traffic. Power outages are common. Making a phone call can be painful. Internet cafés open web pages with tooth-grinding slowness. Corruption is another serious problem. In its latest Corruption Perception Index, watchdog Transparency International gave India an appalling rating of 2.8 out of 10. (A score below 3 indicated “rampant corruption.”) “I had to pay a bribe to build my own house,” complains Bhalla. “I refused. They stopped us [from building] for two-and-a-half years. Eventually, I came with my tail between my legs and paid the bribe.”

On balance, however, Bhalla doesn't see India's myriad challenges as likely to derail growth. “I haven't come up with too many possibilities of where things could go wrong in India anymore,” he says.

Trade activity between Canada and India has historically been low, in part because of our proximity of the U.S. market. But even if India does not live up to the current optimism, it is becoming difficult to ignore. “India should be part of the strategic thinking of North American companies,” says Deloitte's Mathur. “That doesn't mean you have to be there. But you should be strategically thinking about the India opportunity and what it means for your business, whether from a market perspective or a services perspective, and factor that in.”

There are things Hervé Collet will probably never forget about India. He saw a bull impale a car on its horns. He's seen officials refuse to accept documents because punctuation wasn't exactly as prescribed. He's witnessed people fall out of a moving bus because it was too crowded. He still can't figure out how the caste system works.

And now he may never get to. He and Canoro Resources parted ways in May. Not long after, Canadian Business received a call from company president and CEO Les Kondratoff. He'd just learned of Collet's interview with me a month earlier, and said Collet no longer worked with the company. “The reason he's gone is because his experiences are different than mine,” said Kondratoff. “He'd be a poor source of information regarding reality in India, in my opinion.” (Collet says his contract expired and was not renewed by mutual agreement.)

Kondratoff, who has been doing business in India for three years, expressed concern that Collet had criticized the Indian government. (In a way, he had. But Collet also said that the petroleum ministry seemed committed to reducing red tape.) “India is of course a frustrating place to work in a lot of respects because of the bureaucracy, etc., etc.,” Kondratoff said. But he added it was improper to blame countries; rather, businesses must learn to cope with such difficulties. “He [Collet] just didn't grasp what it was all about,” Kondratoff alleged.

India is, after all, a lot to grasp–we hope the articles that follow will help. As for Collet, he's looking for more international work. And his struggles in India haven't soured him on the place. “I'd go back to India, sure,” he says. “I'll go anywhere.”