Opportunities and challenges for foreign direct investment in India.
Introduction –
India called the land of opportunities is the second fastest growing economies of the world (after China) with a stable GDP and one of the most preferred destinations of foreign investments with very strong infrastructure and cheap labour. India’s growth has been steady and is likely to remain around 9 % for the next few years. Agriculture, industry and services being the key sectors of the economy with the shares of 18.5 %, 26.4 and 55.1% respectively. Further more it is emerging as global manufacturing hub with most of the multinational companies having their plants in almost every part of the country. The huge domestic market and availability of low cost workers with advanced technical skills are a few reasons of increasing foreign direct investment in the past few years. Almost half of the multinationals in the United States have their outsourcing plants in the country due to availability of high skilled workers at a very low cost.
There are many opportunities for European companies who wish to start manufacturing in India. The growth rate of the manufacturing sector truly reflects the country’s economic potential, both government and private sector has taken initiatives for developing this sector particularly in the past few years. The sector registered highest growth in March 2007 at 14 % which was almost double as compared to the previous year. The industries which performed well in that year were basically wood, metal, food products, furniture, and cotton textiles. However it is important to build a strategy and study the market in depth before entering as the country is diverse in terms of taste and culture. Many companies that have their plants in India claim that if the location and timing for entering the market is right then the company has a bright chance for success. It is also important to understand the critical relationship between the risk and reward. According to the survey by Deloitte most of the companies have not been able to tap the potential of emerging markets; global manufacturing giants often miss out on the large mass of customers. So the global multinationals need to learn how to build good relations with the local distributors and how to adapt to local circumstances.
Opportunities in the domestic market –
There has been a rapid shift from the low middle class to middle class and even the growing number of upper classes has been a major contributor in the growth of the economy. India has a very strong domestic market and is an attractive destination for global retailers. The retail sector is divided into two - organised and unorganised sectors. Organised retailing is basically done by licensed retailers which include the hyper markets and retail chains. Unorganised retailers refers to low cost retailing like the convenience stores and small general stores, it constitutes around 98 % of the total trade. Food retail is a very large segment of the market and expanding at a furious rate generating huge amount of employment. Around 4 % of the population alone is in the retail trade business which depicts how important the sector is for the economy, though the country still widely follows the traditional form of retailing in the form of small convenience stores and bazaars. With 11 outlets for every 1000 people the retail market is highly fragmented, the report by MC Kinsey states that the segment has the potential of becoming $ 300 billion if it continues to open up. Retailing in the country is the easiest business to enter with low capital and infrastructure which is the reason behind the entrance of giants like Walmart. Walmart still functions largely as an American company and global presence is restricted to ten countries out of which only two are Asian – China and South Korea. It is very conservative in entering global markets unlike General Electric, Coca Cola and Mc Donald’s which has most of their revenues from global operations. The Director of International Affairs for Walmart international says “India has been an important market for us and we have sourced almost 1.2 billion $ worth of merchandise last year and are aiming to increase it by 30 percent every year. She further added that we would like to invest in India’s retail sector if this segment of the economy is open for foreign investment”. The CEO says we have been studying the market trends and we realise that it’s a price sensitive market and we will develop our strategy accordingly. However the biggest fear is that it would affect the business of small retailers and also it would import large amount Chinese goods which would affect the import balance. The entry of a big retail giant in India is a highly sensitive political issue and several hundreds of shop owners were on the streets of New Delhi to protest. They also fear that these big retailers will force the farmers into selling their goods and later on will acquire their land.
