Is India the best BRIC option for the near term?

The luster of the BRIC’s has worn off in 2016.  Brazil is a basket case-the $R has depreciated, GDP has fallen, the Zika virus is alive and the prospect of a summer 2016 Olympic fiasco cannot be dismissed.  In Russia, foreign sanctions continue, falling oil prices and the steady deterioration of the ruble point towards negative 2016 GDP growth too.  China hopes for a soft landing and steady real estate pricing, but hope is not an effective strategy.  Chinese GDP growth has been down forecasted to <5%.
India may be at the top of the heap in most of the BRIC global expansion newsletters I’ve read this year. 

The optimists will cite the advantages of India:

1. Inflation has been tamed and Indian GDP growth is motoring along at 7% a year, making it the world's fastest growing major economy.
2. The Indian rupee has been strong relative to other non $US currencies.The government and the Reserve Bank of India are actively managing the rupee.
3. Low labor costs still exist
4. There is a strong demographic trend for growth in the middle class.The Indian demographic trends are positive with 600 million people under the age of 27, most Indians are entering their prime earning years.
5. Efforts at attracting foreign direct investment will see some success owing to the attractiveness of the large consumer market.There are tax benefits for startups and their investors, such as the 100% deduction of profits for three of the first five years from founding for startups established between April this year and March 2019.
6. The US pivot to Asia and away from China, will entice US manufacturers towards India.
7. There is no greater beneficiary from cheap oil prices than India, one of the world's largest and fastest-growing net importers of fuel.

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The pessimists will counter these statements with India’s long standing disadvantages:

1. Poor infrastructure.  The gridlock and inefficiency of the Indian roads and logistics system cannot be overemphasized.There is tremendous room for improvement.
   1. The Indian government has a target of accelerating the construction of roads 2X greater than previous output.
   2. India has significantly invested in airport infrastructure and now it has begun to focus on improving seaport infrastructure.
2. Poor legal systems.Written agreements have very low value because the courts are clogged.Corruption is widespread because wages are low and worker costs of living are rising.There is little fear for job loss so the risk of getting caught taking a bribe is low.
3. Low worker loyalty.Turnover is rampant (see point 2) due to low wages and inflation.It’s hard to gain quality product and service traction with an ever changing work force.
   

So what are some possible strategies to move forward in India:

1. Look to do business with Indian manufacturers that are inclined to export
   1. There is a much reduced duty for companies re-exporting from India.
      1. There is an Export Capital Goods Scheme (EPCG).Capital goods used in manufacturing can be imported duty free.This duty treatment also extends to sub-manufacturer imports supplying to exporters e.g. packaging manufacturers, subcontractors.
      2. There are much reduced import duties on supplies and components for goods to be finished for export when sent directly.
      3. There are industrial areas which have tax reduced benefits and improved infrastructure, however, one must be cognizant if mandatory labor unions are existent in these areas.
   2. Indian exporters are extremely price competitive and sometimes have preferential duty treatment to third countries.Subsequently, Indian exporters have gained significant export footholds in the Middle East and Africa.
2. Consider working with a joint venture local partner.Local manufacturers are aware of the intricate details of doing business in India.They know how to navigate the legal system (based on the British Commonwealth system).Local partners understand the mindset of the customers and the obstacles sub-suppliers face.Locals also understand how to keep costs low and not bloat local manufacturing costs needlessly.
3. Use your operating base in India to find potential local suppliers that you can use as part of your global supply chain.
4. Brand appropriately with OEM partners.There is a section of the Indian market that wants to use the “intel inside” premium branding for components that boosts value for their finished goods.

I have seen US export investment conservatism during the recent strength of the $US.  Doing nothing will improve nothing-at best you remain constant, but usually you fall behind.  Defensive strategies at a time of a strong $US will spur outside competitors to go on their export offense.  It is time to reevaluate your Indian strategy.

Great thanks to Dileep Rao, Dixita Dinesh and Amit Pande for their insights incorporated to this blog.
 
Good selling!