Cameron bets future on India's meteoric rise


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Jun 23, 2010
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As the coalition Government prepares a Cabinet-led trade delegation to the sub-continent, the country's position as priority number one is clear.

On Thursday night, Ravi Shankar, the legendary Indian sitar player, unveiled his first ever symphony at London's Royal Festival Hall and played the culmination of a life's work of fusing Eastern and Western musical styles.

It is precisely the kind of cross-cultural collaboration that the new coalition Government would like to see played out between British and Indian businesses. May's Coalition Document, which outlined the Conservative-Liberal Government's policies for the current term, specifically pledged to "establish a new 'special relationship' with India". Last week, a delegation of Indian chief executives were given the red carpet treatment as they visited Number 10. Meanwhile, William Hague, the Foreign Secretary, gave a barnstorming speech on Thursday in which he called for "intensified engagement" between the UK and countries such as India. It is in these countries where the "real economic action" is at, Hague said, building on arguments he made in an interview for The Sunday Telegraph last weekend.

Later this summer, David Cameron will lead a large delegation of ministers, FTSE 100 chief executives and education bosses to India in a further attempt to boost links.

So why the sudden flurry of action? What can we learn from UK businesses that are already there? And what does our renewed passion for doing business in India tell us about Britain's place in the world?

The current bout of Indiaphilia is a direct result of the perceived chilliness that hovered over the Labour government's relationship with India. This was largely due to David Miliband, the former Foreign Secretary, causing a diplomatic storm in 2009 when he was seen to intervene in the long-running dispute over Kashmir. The Kashmiri question is widely seen as a domestic issue in India, and his comments were deeply unwelcome. One Indian businessman said last week that Miliband's comments were the equivalent of an Indian minister telling the UK government to pull out of Northern Ireland.

"Doing business in India is all about the relationship. If the relationship does not exist then you don't get past the first base," says the businessman.

India has also come to the fore to redress UK plc's perceived bias towards China in recent years. "There has been a feeling that India has not perhaps had the kind of focus that China has," says Andy Scott, director of international and UK operations at the CBI.

But new beginnings are mainly being forged due to India's enviable economic growth. The Indian economy grew by 7.4pc over 2009, whereas the UK's contracted by 4.9pc. While the UK famously has "no money left", India is seen as the land of plenty.

The key to India's continued growth will be its vastly expanding urban middle-class with a growing appetite for Western goods and money to spare. Between 2005 and 2025, average household disposable incomes are set to treble to 318,896 Rupees (£4,500), a compound annual growth rate of 5.3pc. Its population of 1.2bn is around twenty times the UK's size.

India today is viewed as neither the romantic colonial playground of Kipling nor the "wounded civilisation" of V.S. Naipaul – it is a beast of an economy that every Western country is clamouring to grab a slice of.

Bilateral trade between the UK and India was worth £12bn in 2008 and this is likely to increase to almost £30bn by 2015. Meanwhile, the value of Indian investment in the UK is estimated to be £9bn. There is much more to go for.

Chris Mathias is chairman of I2India, a UK-originated investment company that transfers intellectual property generated in the UK into the Indian market. He says that understanding India's potential requires a completely new mindset.

"India had a really bad year in 2008 when its economy grew by 'only' 5.5pc. That counts as a bad year. To understand India, you have to change your head," he says.

"The Indian economy will grow at around 8-9pc this year. One-third of that is agriculture, which is growing at 2pc. This means that the remaining parts of the economy are growing far quicker, at between 30 and 40pc. Forget about being better than the next guy – the average growth is 30pc."

Certain UK companies have been in India for centuries and hark back to the days of the Raj. Crumbling Standard Chartered logos can be seen on the sides of Victorian buildings in Calcutta. And only last week, HSBC (whose roots in India date back to 1853) announced the acquisition of RBS's retail and commercial banking businesses in India.

However, this new push is about building new bridges. One of the Indian businessmen who visited Number 10 last week was C.K. Birla, the chairman of Hindustan Motors, which manufactures the famous Ambassador car among others and has annual sales of £1.1bn. He welcomes the new Indo-UK spirit of co-operation.

"There are very positive moves about forging relationships. Even in the Queen's Speech there was mention of enhancing the relationship between the UK and India," he says.

The key areas that UK officials believe investment efforts should focus on include defence, pharmaceuticals, energy, infrastructure and education.

Ian Gomes, the chairman of KPMG's High Growth Markets practice and a board member of the UK India Business Council, says that investment needs to be properly targeted.

"For things to work between the UK and India, there have got to be things that the UK is good at and can sell that India wants." he says.

Defence is a prime example. India has vast and growing defence needs. Earlier this year, BAE created a joint venture with Indian company Anjani Technoplast to provide personnel protection materials in India. Meanwhile in April, Tata Consultancy Services, part of India's largest industrial conglomerate Tata Group, became Rolls Royce's engineering partner in India. The British company has around 500 engineers in Bangalore.

But observers believe that there are great opportunities for small and medium-sized UK companies (SMEs) as well as large ones, particularly in areas such as pharma and energy, where the UK excels in innovation and research.

Mr Birla says: "A lot of these businesses don't know what happens in India, so we need to organise events and invite delegations over from the UK."

He names Dyson, the vacuum cleaner maker, as a relatively small UK company that is "amazingly innovative".

Mathias of I2India says that "alternative ways of thinking" need to be found in areas such as energy. This presents a perfect opportunity for UK SMEs keen to expand.

"India is very technologically hungry. The US uses 25 barrels of oil per person per year. India uses half a barrel per person per year. At some point, India's one billion people will want faster cars, more travel and more entertainment. And all that stuff can't be provided by a structure that relies on 25 barrels of oil per person per year. There is simply not enough oil. So alternative ways of thinking have to be found. Technology is the key." he says.

Another commodity that India is crying out for is skills. UK universities and schools will be encouraged to set up satellite branches in the country.

Despite the abundance of opportunities, numerous barriers remain to doing business in India. Talking up the relationship is one thing, but making it happen is something else entirely.

India's infrastructure is famously creaky, but the main barrier is bureaucratic. Numerous sectors in India are still restricted to foreign operators, particularly the banking, insurance, retail and legal services industries.

"There are huge frustrations for UK companies", says Gomes, "particularly since the UK has no restrictions in return. This features in any ministerial meeting," he says.

The rules governing foreign companies in India vary from sector to sector. For example, UK law firms cannot set up in India. Rather, they have to engage a local law firm to work for them. Observers argue that this is because legal institutions in India are run by small-town lawyers who keen to protect their trade from powerful external rivals.

Foreign retailers are also restricted from wholly owning their chains in India. They either have to enter the country through joint ventures (such as Marks & Spencer with Reliance Retail) or through more circuitous routes. Tesco will this year open its first cash and carry store in India, which is technically different from a "retailer" and therefore free from restrictions.

Even in defence joint ventures, a non-Indian partner can only hold a 26pc stake. A disincentive to invest.

"Will BAE or any other defence company want to part with its intellectual property when it is 74pc owned by others?," asks Gomes.

India faces a classic development dilemma. It has to strike a balance between protecting its own interests and nurturing domestic companies, while at the same time encouraging foreign investment and competing on a global scale.

However, the country has been burnt in the past by experimentations in deregulation, which might explain its caution.

Over the last decade, the Indian government has deregulated the telecoms sector, which led to a mushrooming of foreign and domestic operators. As a result, call rates in India are the lowest in the world and operators are struggling to get the necessary volumes. The UK's Vodafone has been forced into a fierce price war in India and earlier this year wrote down the value of its Indian business - Vodafone Essar - by over 25pc. A further challenge is in India's demographics. Although its urban middle-class is growing, over 70pc of the population live in rural areas and are involved in agriculture. Many are illiterate.

Given the state of the UK's economy and its dwindling status as an industrial power, it is clear that the UK needs India more than India needs the UK. Last week, Sir Terry Leahy, the outgoing Tesco chief executive, called on the UK to embrace globalisation and refrain from hankering for a return to "village England". He said that Cameron should accept the UK's dwindling political influence and instead ensure that the country can profit from the emergence of Asia.

Mathias says this could put the UK in an enviable position.

"In 30 years, India will be a global player of significant scale. The UK could be in the unique position where it has a 'special relationship' with the US, the EU and India. From a foreign policy point of view, that is the best place for a small island to be."'s+meteoric+rise&Search=Search

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