Opportunities and Risks of Investing in India
Background Information on Indian Business Environment
In India, the political setup is governed by stable democratic environment. Eighty percent of its population belongs to the Hindu community. The economy has been posting a growth at a stable rate of seven percent. On an average, starting a new business consumes approximately twenty five to thirty days. Average tariff rate in India is seven percent. The government, when it comes to procurement, give enormous preferences and favours to local firms. Foreign participation is limited and the financial sector of India is dominated by state-owned institutions.
Investment climate in India is trader friendly and liberal. Fifty five percent of the Indian population is under the age of twenty five. Working days in India are from Monday to Friday where office timings are from 09:00 A.M. to 05:00 P.M. Foreigners can invest in India through partnerships and joint ventures as a private or public company. The capital of India is New Delhi and the largest city is Mumbai. India has no national language but the official languages include Hindi and English . The currency of India is Indian Rupee represented with a symbol of “INR”.
Key Investment Opportunities in India, Considering Retail Outlets and/or Distribution and/or Manufacture
This section is aimed at making analysis of retail sector in India followed by identification of investment opportunities in the same industry. In its true essence, retailing is function in supply chain and distribution channel in which one organisation purchases consumer goods from its supplier (a manufacturing concern) and sells those items to the consumers directly. A retailer is probably a reseller of consumer goods and not the product producer .
The retail industry of India provides numerous benefits to manufacturer and users of consumer goods. Suppliers are able to reach a broader target market as well as increase product demand while Indian consumers get an opportunity to purchase small quantities of products at a very reasonable price. The retail sector of India is classified into organised and unorganised retail activities . Organised retail sector in India consists of those retailers/traders who possess trading license and are registered to pay taxes to the Indian government. In contrast, unorganised retail activity in Indian economy comprises of those unauthorized small shops and retail outlets that includes corner shops, general stores, and other grocery shops .
The Indian retail sector has been witnessing positive growth in the “Organised Retailing” as many local players have started competing in the Indian retail environment for expansion. Companies like Adani Enterprise, Bharti, Tata, and Reliance are investing considerably in the retail segment of India. It was estimated that the retail sales in India will grow to US$ 804 billion by the end of 2015 from US$ 411 billion in 2011 that reflects growth potential in Indian retail segment. High disposable income, robust economic growth, and speedy development of infrastructure for organized retail sector are some of the major contributors. The retail sector of India accounts for more than twenty two percent of the GDP (Gross Domestic Product) contributing eight percent in the total employment.
In Indian retail sector, investment opportunities can easily be identified in different segments such as beauty care, footwear, watches, jewellery, fashion accessories, textiles, clothing, entertainment, gifts, music, books, catering, grocery, food, furniture, utensils, furnishings, mobiles, home appliances, consumer durables, pharmaceuticals, and health products. Out of these segments, major contribution in the Indian retail sector is played by the “Food” segment that contributes about sixty two percent of the total value. The second segment to contribute to retailing sector is “fashion and fashion accessories” contributing nearly sixteen percent.
For foreign investors, India’s dynamic retail sector represents a lucrative investment opportunity being the 3rd most attractive retailing infrastructure for worldwide retail businesses among the thirty largest developing marketplaces. Rise of nuclear families, increased urbanisation, favourable demographics, rising prosperity among consumers as well as higher preference for branded goods and higher aspirations are some of the basic value drivers to the retail sector of India.
Most of the investment opportunities in the Indian retail industry could be witnessed in different segments such as apparel, lifestyle, fashion, e-commerce, electronics as well as food and grocery. In the past few years, the Indian retail industry is considering the use of computerised or automated systems driven heavily by the technological advancement. Automated technology to plan for merchandise and its management, inventory and supplies cost control, internal store billing as well as electronic replenishment of consumer goods are some of the key areas where business have an opportunity to invest.
In other words, in few years, the retail sector of India is going to witness inclusion of next generation technology in all of its operational activities. Physical stores and outlets could easily be replaced with electronic or online operations to form domains of e-retailing activities. Therefore, there is a very lucrative investment opportunity waiting for Information Technology (IT) companies in this area of concern. Many retailers in India have already started to form an online medium for selling consumer goods online through websites and social networking arenas (like Facebook and Twitter).
In the retail market of India, there is an investment opportunity in the virtual formats where companies (large sized retail chains) will take customer orders online. This will be done through online portals upon confirmation of which orders will be delivered at the doorstep with a same or following day service . The investment opportunities in the grocery and food retail industry of India are immense as it makes up around sixty nine percent of the total retail market. Currently, the Indian retail market is projected to have a financial worth of $490 billion which is expected to grow at a compounded growth rate of six percent and touch level of $865 billion by 2023. Modern retail facilities in India are expected to grow from US$27 billion to US$220 billion across all segments and categories.
In India, organised retailing activity is the new phenomenon with exponential growth. As standard of living for majority of Indians is increasing together with their purchasing power, they are more likely to consumer more products and services. In this regard, the consumption level is more likely to double in India from US$750 billion to US$1.5 trillion within the next five year period. Major contribution in the growth of retail industry of India is to be played by the middle class.
It is estimated that more than ninety one million households will constitute the ‘middle class’ by the end of 2030. Currently, there are twenty one million households in the middle class of India. Moreover, it is also projected that more than 570 million people will migrate from rural to urban areas by 2030. Thus, with huge population and tremendous potential, Indian retail industry is set for high growth when it comes to consumer expenditure by the middle class. With India's increasing number of ‘young’ population and higher local consumption, the macroeconomic trends for the retail segment of India seem favourable.
Key Risks Associated with Investing in India
India has a full potential to grow as its business environment is rich concerning the availability of labour force at reasonable wage rate. However, making investments in India are also subject to certain risks which are discussed in detail within this section with a succinct understanding of Foreign Direct Investment (FDI) perspective. Each risk is followed by mitigation strategy if such volatility could be reduced.
Sovereign or Country-Specific Risk
There exists parliamentary democracy all over India and due to its foreign relations; this country is not facing any interference from serious revolutionary movement or international threat that might result in collapse of the state machinery. Therefore, one can say that the country specific or sovereign risk in case of India is nil or zero . However, many Business and Industrial houses refrain from making investments in the North-Eastern part of India because of unstable conditions despite the fact that investing in such areas is very attractive due to higher literacy rate and large reserves of rich minerals. On the northern tip, Kashmir is a militancy influenced area and, therefore, investing in Kashmir is prohibited by the Indian law.
Political Risk
India enjoys successive years of elected representative government at the federal as well as Union level. India became politically unstable for few years due to the formation of coalition governments as there was not a single party to win clear majority. In the general elections of 1999, the political stability of Indian economy firmly returned with the emergence of healthy and strong coalition governments. Though certain economic decisions got delayed, yet, unstable political outlook did not damage India's bright economic progress. Economic liberalization has been accepted as essential by every political party including the Marxist (Communist Party of India) which mostly interested foreign investors.
In India, political instability poses no investment risk to foreign investors though all political parties follow different ideologies . So far, not a single policy framed by previous government is discontinued by any successive government. Even if this happens, the Indian economic setup will hardly be affected since it is a strong democratic country while the chances of foreign dictatorship or an army coup are minimal. Hence, in India, political risk is absent.
Commercial Risk
In Indian market, there exists a commercial risk in all local and foreign business ventures that not all consumer goods and services are accepted or welcomed by the market. In other words, though the retail industry of India is very lucrative yet the demand for certain products and services may be quite low. In order to manage this risk effectively, it is imperative that the demand and supply forces relating a certain product and service should be examined thoroughly before investing huge financial and non-financial resources. Firms wishing to make investments in Indian market may take help from market research firms for carrying out a comprehensive market analysis.
Terrorism Threat or Security Risk
In India, the threat posed by different local and foreign terrorist groups is substantial. After the terrorist attacks in coordinated November 2008 in Mumbai made it prominent that the security risk in India, driven by uncertainty of collateral damage, is very high. Different locations were targeted in those terrorist attacks such as restaurants, masjids, cinemas, hospitals, markets, railway systems, hotels, and other open public areas. There is an increased possibility that such terrorist attacks may happen in the future by targeting those places frequented by expatriates and foreigners as well as Western iconic locations.
There are numerous terrorist groups operational and active in India where the names of Jaish-e-Mohammed (JeM), Lashkar-e-Tayyiba (LeT) and Naxalites of West Bengal are quite notable in this regard. Common violence created by these terrorist groups disrupts the operations of business environment. They specifically target small businesses that operate in residential areas instead of laying their hands on foreign owned businesses or foreigners themselves.
Bribery and Corruption in India
In India, corruption is well-rooted and expands to different walks of daily life. It acts as one of the major obstacles to the growth of business sector due to which it must be dealt with proactively by exercising regular due diligence and updated risk strategies. In India, inventory transportation and handling often lacks transparency and are actively controlled by corrupt bureaucratic influence that needs careful management.
Law enforcement officials, bureaucrats and politicians often exercise substantial discretionary influence and significant abusive acts were brought to light for which India was ranked 85 of 175 in Corruption Perceptions Index of Transparency International in 2014. To manage this kid of risk, new local and foreign businesses should coordinate with the government to blacklist those known for offering bribes. New businesses can aim to have robust system of internal controls that prevent or discourage fraudulent activities while ensuring that all deals are finalised in a transparent manner. A number of procurement teams and government departments of public sector organisation have started to migrate from traditional business activities to online platforms for reducing the scope of corruption and promote transparency.
Organised Crime
A number of foreign investors are attracted by bogus companies in India through fake lucrative offers and investment opportunities where fraud was carried out concerning the confidential data shared between foreign and domestic counterparts. The existence of rogue call centres is very prominent in Indian economy that use confidential data provided by foreigners despite the fact that these centres have no authorisation to do so. Therefore, the risk of bogus companies and theft of confidential data in India is very high.
References
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Sharma, S.K. & Chandak, R.S., 2015. Challenges Affecting the Unorganized Retail Sector. Journal Of Business Management And Economics, 3(4), pp.1-4.
