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 U.K. business strategies for international trade with India may need to address the complexity and diversity of India's market

U.K.-India International TradeARTICLE

By Karen Lynch

India’s is the fastest-growing large economy in the world, with a rising middle class that can make it increasingly attractive to British exporters.1,2 Many of these same companies are importers of services from India, the birthplace of outsourcing.

Under Prime Minister Narendra Modi, policies are being implemented to improve the country’s business conditions.3 Still, international trade with India is a complex challenge, given the country’s sheer size, market diversity, decentralised political system and often nontrivial obstacles to the ease of doing business and trade.

Exporting to India

India was ranked as the 13th largest export market for U.K. goods and services in 2014, when it was also the 12th largest source of imports by the U.K.4 The U.K. exported £4.3 billion in goods to India in 2015,5 with the biggest merchandise export categories being power-generating machinery and equipment; metals; general industrial machinery and equipment; transport equipment; beverages; electrical machinery, appliances and parts; professional, scientific and controlling instruments and appliances; and chemical materials and products.6

The U.K. also exported £2.3 billion in services in 2015.7 The rise of the Indian middle class is expected to increase demand for financial services in which the U.K. specialises, with demand increasing for other types of business services as well.8

On the foreign exchange market, the sterling dropped about 15 percent against the Indian rupee from February 2016 to February 2017, which can have the effect of making exports cheaper for Indians to buy.9 Meanwhile, steps taken by the Reserve Bank of India to reduce currency volatility have contributed to an improvement in India’s fundamentals.10

India’s growing global trade potential as an export market has garnered significant attention, with its population of 1.33 billion,11 gross domestic product of £1.7 trillion in 2015,12 and GDP growth officially projected at 7.1 percent in the government’s fiscal year (FY) 2016-17.13 All of which does not preclude headwinds. For example, some economists have pared this growth forecast to 6.3-6.4 percent, for reasons including the government's scrapping of high-value bank notes in November 2016.14

Indian GDP per capita was £4,900 in 2015.15 That said, the rising middle class in India is spending more these days. The Indian median income per household is forecast to increase by about 90 percent from 2015 to 2030, to over £8,000. “This level of median income will not only give the Indian middle class a discretionary spending power, but will also help to transform the country’s consumer market from a ‘bottom of the pyramid’ market towards a middle-class consumer market with greater and more sophisticated demand”, according to analysis from the Euromonitor market research firm.16

Digital e-commerce is a growing international trade opportunity, as well, with 462 million Indian internet users.17 Shoppers in India spent some £6.9 billion on international e-commerce sites in 2016, with growth estimated at 85 percent in 2017, according to PayPal.18 The U.K. is among India’s top three cross-border shopping destinations, having attracted 6 percent of Indian online shoppers in the last 12 months, following the U.S. (14 percent) but ahead of China (5 percent).19

In some cases, exports have tended to “follow the money”, so to speak, as £3.6 billion in remittances flowed from the U.K. to India in 2015.20 Experts note that the diaspora from various Indian states plays an important role in strengthening linkages between those states and the countries to which they have migrated, and this includes international trade linkages.21

Historically, the U.K.-Indian trade relationship has declined since the early decades after independence in 1947. At that time, the U.K. accounted for about a third of Indian merchandise exports and imports. Now, however, India trades more with other Asian countries and with the US. 22

Another factor to consider is India’s ranking in World Economic Forum’s (WEF’s) Global Enabling Trade Index: 102nd out of 136 countries.23 The most concerning factors for companies exporting to India are cited as the high cost/delays of domestic transportation, theft and other crimes, corruption at the border, tariffs and non-tariff barriers, and burdensome import procedures. “You must check what the import duty is for your product in India to see if your export is viable”, says the U.K.’s Department for International Trade. “It’s likely to be a minimum of 35 percent once all additional taxes are included”.

Competition is also strong from foreign as well as Indian companies. India’s principal import sources in 2015 were, in order of import value, China, Saudi Arabia and Switzerland. 24

Importing from India

India’s business process management industry is the largest outsourcing provider to companies around the world, with revenue of £22.3 billion in 2016, according to India’s National Association of Software and Services Companies.25 This is the context in which many British companies do business with India. In total, the U.K.’s services imports from India grew from £1.3 billion to £4.2 billion from 2004 to 2011, before falling to £2.2 billion in 2014.26

Imports of £7.2 billion in goods from India in 2015 included articles of apparel and clothing accessories; power generating machinery and equipment; petroleum, petroleum products and related materials; other manufactured articles; yarn; fabrics; footwear; medicinal and pharmaceutical products; manufactured metal products; and road vehicles and other transport equipment.27

Setting up for International Trade in India

Success for foreign companies operating in India typically requires a long-term planning horizon and a state-by-state approach, given the diversity of India’s markets. U.K. foreign direct investment (FDI) in India reached a cumulative £18.5 billion as of the first quarter of 2015, in such sectors as chemicals, drugs and pharmaceuticals, food processing, services (such as financial services), petroleum and natural gas.28,29 This makes the U.K. the third-largest investor in India, after Mauritius and Singapore.

Challenges to doing business are cited by the World Bank’s (WB’s) Ease of Doing Business Index, which rates India 130th out of 190 countries worldwide.30 The WB gives low grades in the categories of “trading across borders” (143) and “paying taxes” (172). India gets better grades in “getting credit” (44) and “protecting minority investors” (13). Foreign companies face varied environments across India’s 29 states and seven union territories, due to India’s decentralised political system, with state-level differences in the quality of governance, regulation, taxation, labour relations, and education levels.31

All that said, recent policies have aimed to institute a one-stop shop for clearances, speed the permit process, relax government restrictions, and institute a national goods-and-services tax (GST) that would reduce compliance costs and tax-induced inefficiencies in transporting goods cross-country.32

Demand for skilled workers is high, particularly from the well-regarded Indian Institutes of Technology, both within India and from overseas employers. Overall, however, India ranks 105th out of 130 countries in WEF’s Human Capital Index.33

Cultural Considerations for International Trade

Advice on India’s business culture is extensive. For example, “Indians have a 'relativist' approach [versus ‘absolutist’], which sees everything as transient and subject to change, so they're likely to view a contract as a draft document subject to later amendment,” according to a recently published “how-to” in the Sydney Morning Herald.34 Other tips included leaving time for negotiation and building trust and respecting hierarchy. "Business people who can deal with uncertainty will do well in India, those who want everything to be black and white will struggle," the article concluded.

The Takeaway

India’s standout economic growth in a low-growth global economy combined with its rising middle class make it an attractive export market. Doing business there can be complicated, however, and advisors recommend companies deploy strategies that accommodate complexity and diversity.

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

1. “Horizon Scan Report 2017,” Business Continuity Institute;http://www.bcifiles.com/HorizonScan2017.pdf
2. "Supply Chain Disruption: Sunken Ambitions", Financial Times; https://www.ft.com/content/6b20d192-0613-11e1-ad0e-00144feabdc0
3. Global Risks Report 2017,World Economic Forum;http://reports.weforum.org/global-risks-2017/part-3-emerging-technologies/3-3-physical-infrastructure-networks-and-the-fourth-industrial-revolution/
4. Hot Weather: Rail Services Disrupted on U.K.’s Hottest Day,BBC;http://www.bbc.com/news/uk-36833042
5. "Weather Advisory: Winter Storm Niko to Cause Shipping Delays",Marisol International; http://blog.marisolintl.com/weather-advisory-winter-storm-niko-to-cause-shipping-delays
6. "Stitched Up: How the Global Giants are Squeezing Out Australian Fashion", Sydney Morning Herald; http://www.smh.com.au/business/retail/stitched-up-how-the-global-giants-are-squeezing-out-australian-fashion-20170209-gu9arc.html
7. Ibid.
8. "IBM and the Weather Channel. A Match Made in … Huh?", CNN; http://money.cnn.com/2015/10/28/technology/ibm-weather-channel/
9. "A Comprehensive Weather Platform for Supply Chain Management,"Understory; http://understoryweather.com/business-solutions/weather-analytics-solutions-supply-chain-management/
10. "The Gurus are Back! 2017 Supply Chain Predictions",Supply Chain Digest;http://www.scdigest.com/firstthoughts/17-01-26-1.php?cid=11850/
11. "The Next Fashion Trend: Weather Forecasting",Wall Street Journal; https://www.wsj.com/articles/the-next-fashion-trend-weather-forecasting-1480248007
12. "Understanding the Role of Weather in the Supply Chain", the Met Office; http://www.metoffice.gov.uk/media/pdf/g/c/151009_Understanding_the_role_of_weather_in_the_supply_chain_report_Final.pdf
13. "Thailand Province Successfully Trials Flood Simulation System,"ComputerWeekly; http://www.computerweekly.com/news/450297413/Thailand-successfully-trials-flood-simulation-system
14. "Thailand Unveils Flood-Prevention Plan,",Al Jazeera; http://www.aljazeera.com/news/asia-pacific/2012/01/201212053713768888.html
15. "3 Ways El Niño Could Impact Your Supply Chain and What You Can Do About It",Supply Chain 24/7; http://www.supplychain247.com/article/3_ways_el_nino_could_impact_your_supply_chain_and_what_you_can_do_about_it

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