Marking 70 years of independence: a new chapter has begun in India's growth story
On 15 August 2017, India celebrated 70 years of independence from the British Empire with vibrant celebrations across the country. The festivities provided a moment to reflect on how much India has changed and to highlight the major economic opportunities across the country today. But the Indian tiger is far from tamed, and investors should come prepared if they are to harness this growth effectively.
70 years ago, India was reeling from partition and poverty, struggling to stand on its own. Today, though social and political challenges persist, it is a country of more than 1.3 billion people supporting a GDP of over US$2.2tn. Around half of the population is under 25 years of age and India’s growth rate is some six or seven percent, making it one of the world’s fastest-growing economies.
As in many high-growth emerging economies, opportunities for international investors come with significant risks. The Indian Government is pushing a wide-ranging reform agenda to address this, but in the largest democracy in the world, things are rarely straightforward. To stay on track and prevent costs spiralling, there’s a pressing need for localisation, collaboration and partnership, and a certain amount of patience.
The scale of the opportunity
The opportunities for investment across infrastructure, real estate and construction are many. The government estimates that construction contributes some eight percent of GDP and accounts for the second largest inflow of Foreign Direct Investment (FDI).
Infrastructure generates around 50 percent of construction demand, while rapid urbanisation is driving industrial, commercial and residential development in cities: the 2011 census showed that 377 million Indians lived in cities – up 32 percent from 2001 – and this is projected to rise to 590 million by 2030.
From emerging economy to Indian tiger: government reforms
Investors may also be encouraged by the steps taken by the government to attract inward investment.
Since his election in 2014, Prime Minister Narendra Modi has led a multitude of government programmes that prioritise manufacturing, technology and entrepreneurship. From Start Up India and Skill India, to Make in India, a major inward investment initiative which aims to boost manufacturing to 25 percent of GDP by 2022. This includes the creation of five industrial corridors – such as Delhi to Mumbai – to facilitate industrialisation and planned urbanisation.
Rapid urbanisation brings with it challenges of overcrowding, pollution, poverty and inadequate infrastructure and housing and the government has recognised the need for centralised planning and controlled development to create productive cities.
The ‘Smart Cities’ programme is selecting 100 cities in which to deliver improvement (retrofit), renewal (redevelopment) and extension (greenfield development) projects, alongside pan-city initiatives applying smart solutions in areas such as sanitation, waste, energy, connectivity and health.
‘Ease of doing business’
The government has taken many steps to improve India’s ranking in the World Banks ‘ease of doing business’ index. Conscious and determined efforts have yielded positive results and India now ranks 100th, a substantial improvement since last year.
Government is driving reform here too: in July, India implemented one of the most radical tax reforms in its history. The Goods and Services Tax (GST) replaced a rabbit warren of indirect and state taxes with a single national tax, while also reducing the number of tax rates and creating uniform compliance processes.
Likewise, there are barriers to growth in the real estate sector. Earlier this year, it enacted the Real Estate Regulation Act (RERA) to streamline the bureaucracy surrounding the industry. This followed further liberalisation of FDI rules in 2014, which now enable 100 percent FDI for development and infrastructure.
Implementation of these reforms will be a bumpy ride and there remain a number of priority areas where investors should take action to manage risk and ensure good performance.
Diversity, bureaucracy and technology
The GST may have created a single market, but India is far from homogenous. With 29 states and 22 official languages, India can be a challenging place to work even for internal migrants, let alone overseas businesses. Top of the list of obstacles in construction is the complex permit system.
India has some 34 procedures across multiple departments including environment, development control, engineers, road, fire, water, public health, local statutory bodies and many more. It takes an average of 196 days to acquire construction permits. RERA may improve this, but it remains important to allow adequate time in programme and project plans, and to work with an established local compliances agency to process permits efficiently.
Investors should address these combined challenges through close collaboration and by developing an in-depth understanding of local market conditions. A series of linked business and project plans should be created and appropriately localised, accounting for both regulatory and cultural differences.
International expertise has a role to play alongside local knowledge. Mechanisation has made huge progress in India in recent decades, but the full incorporation of modern technology to boost productivity in the construction process is still some way off. New techniques, which are yet to become standard even in developed markets, hold huge potential to drive performance. Working with international consultant partners can help by facilitating knowledge transfer across borders.
Collaboration and patience
One of the downsides of India’s growth acceleration is that the supply chain has struggled to keep up.
Tier one contractors tend to be available only for the largest projects and overseas contractors have struggled to succeed in this market. As construction has expanded, skills gaps have emerged and there remain tendencies to do things informally, rather than through structured procurement.
A robust contracting strategy will plan for such hurdles, and providing support and supervision to tier two and three contractors will help ensure health and safety, quality, programme and budget stay on track.
Collaboration is vital. Contracts are generally not well-enforced and it’s important to work with contractors to help them prepare for all possibilities. Early efforts on scheduling works and assessing materials and labour availability will pay dividends later.
As these challenges suggest, patience is also a key ingredient. Investing in India is exciting, but it’s a complex market for new entrants and quick returns are hard to come by. Investors should be prepared to think long term, where the greatest rewards lie.
India’s scale, vibrancy and dynamism are undeniable – it’s a market Turner & Townsend has been part of for ten years and the country is only going to play a greater role in the global economy in the future.
After 70 years of independence, India has never been so open to the rest of the world, but entrants should come ready to adapt, collaborate and join us for the long haul.