In a recently-published WB report, India is ranked 132nd, in terms of ‘ease of doing business' and a disheartening 166th, in terms of ‘starting up new businesses'.
It's quite apparent that it's a lot more difficult to start a new business in India than it is to remain engaged in doing an existing one. I propose to identify some of the behavioural and policy issues, which we need to address in such an environment, so that a fast-growing market can be a profitable one too.
The gaps in the rankings essentially means that having navigated the regulatory environment to overcome the start-up challenges, the organisation is relatively better-equipped to manage the business going forward, as the hurdles are less, with a better ranking for “ease of doing business”. Yet, one cannot ignore the key policy and regulatory challenges that companies and organisations face in India. This gets even more amplified for new ventures.
GOVERNANCE FRAMEWORK
The biggest challenge that most multinational companies face is the unique architecture of the Indian governance framework, which is badly intertwined between the Central and State structures. Hence, the attractiveness of contiguity of geography needn't enable simplicity of market access, and may not even offer benefits of scale due to logistics optimisation.
The reasons are simple. State laws and incentives are structured to attract investments which local leadership see as critical to driving economic growth, and are also dependent on electoral constituencies of ruling parties.
An interesting example is alcohol. You can buy a bottle of wine or beer within a mile's length of desire in Bangalore, but 50 km away in the state of Tamil Nadu, you would be hard-pressed to even locate a store.
It's not uncommon for neighbouring State Governments to have vastly differing legislations on labour, land acquisition, commercial taxes, priority sector categorisation for incentives, and intrastate movement of goods.
These come into play in a substantial way when planning investments in India. Very often, companies get lured with incentives and/or hinterland market access, yet realise much later that it doesn't translate to improved returns on capital employed.
A classic example is the currently applicable duty on automobiles, which includes customs duty, CENVAT, excise duty, central sales tax, motor vehicles tax, passenger and goods tax, state sales tax, and additional road user/toll taxes. All of which ensure that you could buy a car manufactured in Gurgaon at a much cheaper price 2,000 km away in Goa or Pondicherry .
In addition, duties and levies see frequent changes in the Annual Central and State budgets presentation exercise.
POLICY ENVIRONMENT
And not all MNCs are able to cope with the uncertainty and want of clarity around the policy environment. A good example of the recent past is the telecom sector, which saw a huge enthusiastic entry of large MNCs when the sector was opened up for FDI, and soon enough, many exited, thanks to the ever-changing policy framework. The few that survived were mostly Indian, and earned good returns. The boldest of them all, Vodafone, a start-up MNC, continues to battle the Government in the Indian courts. The risk of an uncertain regulatory environment eventually ensures that those who survive usually do so with good returns. This brings us to an interesting conundrum, when we compare ourselves with China. While most statistics reveal that FDI in China is almost three times that of India, yet, in terms of GDP growth, China delivers just a percentage point more than India. Consequently, it may be assumed, with some degree of certainty that the return on capital for investments, made by foreign firms in India is, on an average, higher than China.
A recent McKinsey study showed that the nine market leaders by category in India enjoyed a ROCE (Return on Capital Employed) of 48 per cent, and even the next 26 enjoyed a ROCE of 36 per cent. Implicit in the return is the reward for managing the regulatory risk. Interesting inclusions in the list are Korean white-goods-maker LG and automobile giant Hyundai, and Japanese automotive giant Suzuki. Surprisingly, these companies don't enjoy market leadership in their very own home countries, which score far higher than India in terms of ‘ease of doing business' or ‘starting up anew'. The one common theme visible across these companies is their willingness to remain engaged with the regulatory environment and manage the concomitant uncertainties. Their ability to win includes, in large measure, their capacity to allow scale to subsume the vagaries of an uncertain political and regulatory environment.
Very few markets on the planet continue to offer the opportunity of scale to drive interest from policymakers at a Government-to-Government level. This, in a sense, forces the Government to ensure moderation in policy level interventions, and limits the risk of any potentially-destabilising policy dispensation. Simultaneously, it leaves enough on the table to help enhance returns by carefully understanding the policy regimen. As all countries emerge from their current crises, there will be increased regulation, and business leaders need to build a deep understanding of the regulatory environment and governance frameworks, to deliver improved returns for their enterprise.
JOINT VENTURES
The coming decade will be a decade of momentous change, as India integrates better with the global economy, focuses on driving greater competitiveness, and draws up a policy framework to enable a more transparent governance structure. Those MNCs that participate in this process are likely to position themselves more strongly to succeed, compared to those that rely on local Indian partners or JVs. The reason isn't difficult to fathom. Indian JV partners would be mostly family-owned or state PSUs, and, in most cases, diversified. Consequently, they may often have competing priorities in leveraging their relationship with the Government, and hence deferring to them for insights is fraught with inherent risks.
In fact, many a times these conflicting interests can make the task of setting up a new business in India appear a lot more difficult than it might actually be. From my own experience of having been involved in the setting up two new businesses for an MNC in India, a key driver of success has been the ability to understand the regulatory environment and factor in the risk-reward from policy changes in the “best case scenario”, while developing the business forecasts. You may not always get it right, but if you do, then your fastest growing market could well be your most profitable one too. A story that most shareholders like!
(The author is Global Head, Business Intelligence and Strategy Analysis, Shell India Markets Pvt Ltd. The views expressed are personal.)