TITLE PAGE TO BE SUPPLIED SEPARATELY AND TO BE INSERTED BY PRINTER

Commonwealth of Australia 2001 This work is copyright. Apart from any use permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Economic Analytical Unit. Requests and inquiries concerning reproduction and rights should be addressed to the Executive Director, Economic Analytical Unit, Department of Foreign Affairs and Trade, RG Casey Building, John McEwen Crescent, Barton ACT 0221. Austrade contributed to the cost of producing this report.

National Library of Australia Cataloguing-in-Publication data: 12 November 2001 India: new economy, old economy. Bibliography. ISBN 0 642 56583 X ISBN 0 642 56584 8 (CD-Rom). 1. Investments, Foreign India. 2. India Economic conditions. 3. India Foreign economic relations. I. Australia. Dept. of Foreign Affairs and Trade. Economic Analytical Unit. 330.954

Design, typesetting and printing by Green Advertising #15398

A c k n o w l e d g e m e n t s

ACKNOWLEDGEMENTS

This report was directed by Michael Growder, Acting Director, Economic Analytical Unit and James Hyndes, Deputy Director, was part of the production team. Dr Frances Perkins, Executive Director, provided advice and oversight. Bill Brummit, former Director, also contributed to the report. The Australian High Commission in New Delhi provided invaluable assistance in producing this report, coordinating Economic Analytical Unit visits to India, providing relevant material, data and comments on the report. We thank Rob Laurie AM, former High Commissioner; Bryce Hutchesson, Deputy High Commissioner; Elizabeth Ward, First Secretary; Julie-Ann Guivarra, Third Secretary; Clare Duffield, Third Secretary; Seshadri Sathyamurthi, Research Officer; Mary Lupul, Country Manager, Australian Centre for International Agricultural Research; Bernadette McDonald, Counsellor, Australian Education International, and Dr Sheel Nuna, Senior Manager, Australian Education International. Within the Department of Foreign Affairs and Trade in Canberra, we thank Pamela Fayle, Deputy Secretary; Gillian Bird, First Assistant Secretary, South and Southeast Asia Division; Patrick Suckling, Tony Huber, Judith Laffan, David Holly, Michaela Browning, Susan Begley, Sunny Idehen, John Powys, Tim Yeend and Trent Smith for their valuable assistance. Within Austrade, we thank Roger Bayliss, Executive General Manager, Middle East and Indian Ocean Region, Dubai; in New Delhi, Rick Kovac, Senior Trade Commissioner; Richard Francis, former Trade Commissioner; Rajeev Varma; Sanjay Khandelwal, Manager; Alka Batra, Business Development Manager; Harsh Mohan Puri, Business Development Manager; Punish Raheja, Market Research Officer; Amarpreet Singh, Assistant Operations Manager; in Mumbai, Shabbir Wahid, Consul General and Trade Commissioner; in Chennai, Ayub Tareen, Post Manager. In Austrade Canberra, we thank Jessica Ramsden-Smith, Manager, Middle East and Indian Ocean Region; Jim Enright, former Manager; Lucy ODonnell, Project Manager; Mark Johnson, Project Manager; Annelie Mitchell, Project Manager, and Joshua Hutton. The Economic Analytical Unit wishes to acknowledge the contribution made by the following consultants: Deepak Talwar and Associates, New Delhi; Dr Rajesh Chadha, National Council of Applied Economic Research, New Delhi, and Professor Kaliappa Kalirajan, National Graduate Institute of Policy Studies, Tokyo; Professor Bibek Debroy, Rajiv Gandhi Institute, New Delhi; John Fuhrman, Alister Maitland, Dr Elizabeth Maitland and David Smith, The International Panel, Melbourne; Professor Marika Vicziany, Monash Asia Institute, Melbourne; Mr Kanhaiya Singh, Australian National University, Canberra; Mr S.K.N. Nair, National Council of Applied Economic Research, New Delhi; Dr Shashanka Bhide, National Council of Applied Economic Research, New Delhi, and Professor Richard Shand, Australian National University, Canberra. We thank the Australia-India Business Council, and in particular, Neville Roach, President; Bernie Delaney, Vice President; Chris Hartley, Vice President; Jacqueline Allen, Executive Director; and Paddy Daly, former Secretary.

P A G E iii

I N D I A N E W E C O N O M Y, O L D E C O N O M Y

Special thanks are due to the following people in India, Singapore, the United States and Australia who gave time to be interviewed by the Economic Analytical Unit, and supplied material, information and insights. In India, we thank: George Abraham, General Manager, Mahindra Industrial Park Ltd; John Alexander, Vice President, J. M. Baxi and Co; Dr Anil Sharma, Principal Economist, Dr R. Venkatesan, Principal Economist, National Council of Applied Economic Research; Nirupa Bhatt, Manager, Argyle Diamonds; Dr Pronab Sen, Adviser, Planning Commission; Dr Omkar Goswami, T K Bhaumik, Senior Advisor, Sunil Parekh, Director, K. S. Ganesan, Executive Officer, T.S. Vishwanath, Consultant, Confederation of Indian Industry; Dr Shiela Bhide, Principal Secretary, Andhra Pradesh Ministry of Industries and Commerce; Devendra Chaudhry, Director, Ministry of Information Technology; Professor M. Govinda Rao, ISEC; VK Srinivasan, Nilgiris Supermarket; N. K. Choubey, Managing Director, Vikram Desai, Principal, Ajay Khera, Consultant, Central Warehousing Corporation; Dr S.K. Chaudhuri, Regional Director, International Wool Secretariat; Anjuly Chib Duggal, Director, Ministry of Commerce and Industry; S.K. Dhar, Regional Manager, SMEC; Dr Tarun Das, Economic Adviser, Ministry of Finance; G. Gurcharan, Government of Karnataka; Satya Priya Gupta, Joint Secretary, Ministry of Mines; Ashutosh Ghanekar, Associate Director, Preeti Sinha, Senior Manager, Rabo India Finance Pty Ltd; Barry Moss, National Sales Director, Ranier Harding, National Product Manager, Elcon-Clipsal India Ltd; Siddharth Jain, Manager, Rio Tinto; Ashok Jha, Advisor, S. Sunanda, Senior Assistant Secretary, Federation of Indian Chambers of Commerce and Industry; Vinay Jha, Principal, Antares; Sanjeev Kapur, Director and Country Manager, Lumley Technology India; P. B. Patel, Senior Vice President, Snehal Kantharia, General Manager, Samir Mankad, Deputy General Manager, Adani Exports Ltd; Sunil Vaze, General Manager, Indranil Dasgupta, Analyst, Enron India Pty Ltd; Prakash Kuruvilla, Senior Manager, HSBC; S. Krishnan, Manager, Infosys; John Lyndon, Australian Team Leader, India Australia Training and Capacity Building Project; Sunil Tandon, Managing Director, Port of Pipavav; S. Madhusudan, Vice President, GVK; Adit Jain, Managing Director, Anuradha Das Mathur, Vice President, EIU; Poonam Kumar, Chairperson and Managing Director, Mega Ace Consultancy Ltd; K. Narayan, President, S. Mohnot, General Manager, Prateek Panday, General Manager, Reliance Industries Ltd; Lucio Monari, Senior Economist, Stephen Howes, Bhaskar Naidu, Mandakini Kaul, World Bank; Ajay Narayanan, Vice President, IDFC; S. Narayanaswamy, Technical Consultant, Tri-Sakthi Energy; Ridham Desai, Vice President, JM Morgan Stanley; Aashish Pitale, Vice President, Shuchita Mehta, JPMorgan; Narendar Pani, Senior Editor, The Economic Times (Bangalore); Arun Patel, Managing Director, MCC; Dr Indira Rajaraman, Chair Professor, NIPFP; Rajan Sudesh Ratna, Joint Director General, Ministry of Commerce; Walter Joseph, Regional Director, K.V.V. Rajan, Marketing Advisor, Western Australian Trade Office; T.L . Ramachandran, Senior Manager, Andhra Pradesh Industrial Infrastructure Corporation Ltd; Nandlal Rungta, Managing Director, Rungta Mines Ltd; Pradip Shah, Chairman, IndAsia; Asit Shah, Director, Credit Suisse First Boston Securities Ltd; Dr K.N. Shelat, Industries Commissioner, S.A. Dula, General Manager, Arvind Shukla, Managing Director, Jignesh Vasavada, Deputy Director, Gujarat Industrial Extension Bureau; Bhashit Dholakia, Manager, Metropolis Gas Pty Ltd; Dr U Sankar, Professor, Madras School of Economics; N. Sriraman, Managing
P A G E iv

A c k n o w l e d g e m e n t s

Director, Karnataka Udyog Mitra; R.K. Sharma, Secretary General, Satyajit Singh, Deputy Secretary, Federation of Indian Mineral Industries; David Twine, Vice President and Country Manager, BHP Billiton; Dr K.K. Tripathi, Director, Department of Biotechnology; Robert Thomas, Managing Director, Gujarat Gas Company Ltd; Dr Jandhyala Tilak, Senior Fellow and Head, National Institute of Educational Planning and Administration; Vipul Tuli, McKinsey and Co; Captain Jimmy Sarbh, P&O Ports; S. Vijayaraghavan, Customer Relations Officer, Tidel Park Ltd; Dr Kamal Raj, Director, Dr D. Ajit, Director, B.K. Bhoi, Director, Asha Kannan, Director, Deepak Mohanty, Director, M.R. Nair, Officer-in-Charge, Dr N. Nagarajan, Adviser, R.M. Vasanthakumari, Adviser, Reserve Bank of India; Pramit Palchaudhuri, Senior Assistant Editor, The Telegraph; Saumitra Chaudhuri, Economic Advisor, ICRA Ltd; Ravi Narain, Managing Director and CEO, National Stock Exchange of India Ltd. In Singapore, we thank: Lindsay Coburn, Head of Research for Asia, David Forrester, Economist, IDEA Global; Michael Lim, Director, Takahira Ogawa, Director, Standard and Poors; and Sanjay Mathur, Associate Director, Warburg Dillion Read. In the United States, we thank: Vijay Kelkar, Executive Director for India, Elizabeth Winters and Gary Pursell, World Bank; Dr John Williamson, Senior Fellow, Institute for International Economics; Tim Callen, Ranil Salgado, International Monetary Fund; Dr Ashok Gulati, Division Director, International Food Policy Research Institute. In Australia, we thank: HE Rajendra Rathore, High Commissioner, Pavel Diengdoh, Deputy High Commissioner, Indian High Commission, Canberra; the Hon Mike Ahern, Special Representative for Queensland, Queensland Government;Peter Buckley, Country Program Manager, Percy Stanley, Director, AusAID; Warwick Spicer, Cactus Imaging; Kamalesh Goswami, NIIT; Paul Bridgwood, Executive Manager, Energy Equity Corporation Ltd; Zarir Bamji; Peter and Margaret Scanlan, Peter Scanlan Wools; Katrina Spencer, Australian Wheat Board; Bill Henderson, Gerard Industries; Richard Bushell, Marketing Director, Warman International Ltd; Jo Evans, Environment Australia; Ashley Cross; Richard Cameron, Architect, Australian Hospital Design Group; Don Cunningham, Regional Manager, Pacific Power; Megan Durant, Marketing Manager, RMIT University; Jeff Williams, Managing Director, Mel Drummond, Director, Mineral Deposits Ltd; Dr Stewart Routledge, Executive Director, Natasha Davis, Project Manager, GRM International Pty Ltd; Carl De Koning, General Manager, Air International; Graham Ferguson, Senior Manager, Robert Krakowiak, Senior Manager, Reetica Rekhy, Consultant, Australian Business Ltd; Darren Gribble, Darren Gribble and Associates Pty Ltd; John Grounds, Consultant, URS; Collins Hiss, Managing Director, Michelle Stegbauer, Marketing and Communications, Ron Morcom, Margaret Crowley, Lumley Technology; Ross Hitt, David Guy, SMEC; John Eckermann, John McPartland, former Director, Gilbert Hennequin, Regional Manager, Monash International; Lyle Jackson, Managing Director, Union Switch and Signal; Scott Lambert, Director, Frances Rose, Australian Education International; Sean Mahony, Business Project Manager, Randeep Agarwal,

PAGE v

I N D I A N E W E C O N O M Y, O L D E C O N O M Y

Woodside; Gayle OBrien, Senior Trade Officer, Queensland Department of State Development; Linda Young, Export Manager, Fred Parker, Mining Consultant, Runge Pty Ltd; Russell Pynt, Director of Marketing, Chalmers Institute; John Ulhir, Managing Director, Ulco Medical; John Burgess, Greg Rashford, former General Manager, Rio Tinto; Simon Johnson, Director, Jacob Verghese, Regional Manager, West Australian Department of Commerce and Trade; Kim Rintoul, Marketing Officer, AgraCorp Pty Ltd; Alan Roy, Director, White Mining Ltd; Sig Sovik, General Manager, Telstra; Hitesh Shah, Business Manager, AXA; Gordon Thompson, Managing Director, Kristy Johnson, International Centre for Application of Solar Energy; Lyndal Thorburn, Advance Consulting and Evaluation Pty Ltd; Alistair Henderson, Managing Director, Gary Worth, Business Services Director, Baltec Systems Pty Ltd; Richard Tait, Head of Customer Technologies, Dinesh Anand, Regional Credit Executive, Elmer Funke Kupper, ANZ; Kerri Redfern, Senior Executive Officer, Robyn Ellison, Senior Strategy and Planning Officer, Argyle Diamonds; Jamie Seccombe, Colly Cotton; Gordon and Patty Wright; Kevin Baddiley, Chairman, Australia-India Fresh Food Alliance; Maurice McGrath, Fosters Group; Kate Pembroke, Government Relations Officer, Australian Tourist Commission; N. Balakrishnan, Regional Manager, International Division, Berri; Megs Gildea, TV Series and Features Manager, Cutting Edge; Gary Linton, General Manager, Greenspan; Sheridan Hume, Manager, Alan Freshwater, AMP; Dave Isles, Grenfell Resources; Danny ODea, Australian Bureau of Statistics; Mike Turbott, Managing Director, Austpac Resources; Purvez Bilimoria; Christopher Snedden, Editor, Australia-India Focus; George Smith, Richard Wooland, Department of Primary Industries, Queensland; Paula Collins, Collins Group; Alan Manly, Director, Liam Kenny, Marketing and Client Services Manager, Central College; Anil Verma, Director, Polaris Software Pty Ltd; Murray West, Partner, Alpana Roy, Solicitor, Clayton Utz. We also thank BHP Billiton who is the Economic Analytical Units corporate sponsor, and Austrade, who sponsored the report. Lyn Lalor did the typesetting and figures and Greg Carter provided administrative assistance.

P A G E vi

E c o n o m i c

A n a l y t i c a l

U n i t

ECONOMIC ANALYTICAL UNIT

Initially called the East Asia Analytical Unit, the Economic Analytical Unit was established in 1990 as the main agency within the Australian Government responsible for publishing analyses of major economic and political issues in Asia and other emerging markets. In 1999, the Units research scope was expanded to include important emerging market issues outside East Asia, so in November 2001, it was renamed the Economic Analytical Unit. Part of the Department of Foreign Affairs and Trade, to date the EAU has released 27 reports on major issues related to Australias trade and investment policy interests. Staffed with seven professionals, the EAU also contracts a range of consultants with specific areas of expertise. It draws on a wide range of data and information sources, including Australias diplomatic and trade missions around the world. The Unit produces reports and briefing papers intended to assist analysts and decision makers in business, the Australian Government and the academic community. Full copies of previous reports and executive summaries now can be downloaded from the Internet. See website details below.

Contact details:
Economic Analytical Unit Department of Foreign Affairs and Trade RG Casey Building John McEwen Crescent Barton ACT 0221 Australia Telephone: +61 2 6261 2237 Facsimile: +61 2 6261 3493 Email: eastasia.analytical@dfat.gov.au Internet site: www.dfat.gov.au/eaau Executive Director of the Unit Dr Frances Perkins Directors Brendan Berne a/g Michael Growder Deputy Directors Joanne Frederiksen David Lowe James Hyndes Administration Greg Carter

P A G E vii

I N D I A N E W E C O N O M Y, O L D E C O N O M Y

P A G E viii

T a b l e

o f

C o n t e n t s

CONTENTS

ACKNOWLEDGEMENTS ECONOMIC ANALYTICAL UNIT EXECUTIVE SUMMARY Macroeconomy and Reforms Trade Foreign Investment The Business Environment The Australia-India Business Relationship New Economy Opportunities Old Economy Opportunities The States Implications CHAPTER 1 MACRO PERFORMANCE, REFORMS AND PROSPECTS Fast Growing, Better Performing Economy Strong Performance in Recent Years Growing Income and Wealth, Falling Poverty Improved Inflation Performance Divergent Sectoral and Regional Performances Economic Sector Divergence Regional Divergence The Reform Process Reform Stimulus Major Reform Focus Financial Sector Reform Reform Results Reform Slowing since Mid 1990s Unfinished Reform Agenda Fiscal Reform Bureaucracy, Infrastructure and Bankruptcy Policies The Future of Reforms The Political Economy of Reform Political Parties and Recent Results Recent Issues Economic Prospects Short Term Growth Outlook

iii vii xv xv xvi xvi xvii xvii xvii xviii xviii xix 1 2 2 3 6 6 6 8 8 9 9 10 10 11 12 12 14 14 15 15 15 16 16

P A G E ix

I N D I A N E W E C O N O M Y, O L D E C O N O M Y

Longer Term Growth Scenarios Assessment Implications Key Indicators References Appendix CHAPTER 2 TRADE REFORMS AND TRENDS Major Trade Reforms and Outcomes Less Import Licensing Nominal Tariff Rates Falling Export Controls Floating the Exchange Rate Overall Trade Performance Exports Export Composition Direction of Exports Imports Growth and Composition Import Sources Unfinished Trade Reforms Remaining Non-Tariff Barriers on Imports High and Complex Tariffs Biases Against Exports Customs Procedures Difficult to Navigate Participation in Multilateral Trade Forums Implications for Australian Business References CHAPTER 3 FOREIGN INVESTMENT Opportunities in the Dual Economy Successful Sectors Successful States FDI Trends Over the 1990s Country Shares and Trends Foreign Investment Regime Foreign Ownership Limits Preferences for Small Firms Other Restrictions Reform Prospects and Business Implications References

17 18 19 19 21 22 23 24 24 24 26 27 28 30 30 31 32 33 34 36 36 37 37 37 38 38 40 41 42 42 44 44 46 47 48 49 49 49 50

PAGE x

T a b l e

o f

C o n t e n t s

CHAPTER 4

DOING BUSINESS IN INDIA Implications of Indias Culture and History The Current Business Environment Setting up a Business Labour Laws Inspections and Compliance Risk Coverage Transparency Issues Infrastructure Labour Costs Overall Competitiveness The Legal System Intellectual Property Protection Bankruptcy and Exit Issues Competition Corporate Governance The Basics of Doing Business Business Relationships Investment Structures Selecting Office or Factory Locations Dealing with Banks Taxation Issues Other Government Incentives Foreign Exchange Regulations Environmental Protection Requirements Visa Requirements and Employing Foreign Nationals Implications for Australian Business References and Further Reading Appendix 1 Appendix 2

51 52 52 53 53 53 53 54 54 55 56 56 57 57 58 58 59 59 60 61 62 62 64 64 64 65 65 66 68 70 71 72 73 73 73 76 77 77 79 79 81 82

CHAPTER 5

THE AUSTRALIA INDIA BUSINESS RELATIONSHIP Australia-India Trade and Investment Opportunities Overall Trends in Australian Exports to India Agricultural Exports Wool Cotton Wheat Fruit and Vegetables Resource Exports Coal Metals Elaborately Transformed Manufactures

P A G E xi

I N D I A N E W E C O N O M Y, O L D E C O N O M Y

Services Exports Tourism Education Environmental Services Health Services Other Services Exports New Export Horizons for Australia Processed Foods Gas Film Production and Services Australian Investment in India Indian Trade and Investment with Australia Indian Imports into Australia ETMs Dominate Imports Indian Investment in Australia Implications for Business References CHAPTER 6 OPPORTUNITIES IN THE NEW ECONOMY Information Technology IT Industry Overview Industry Structure and Growth Software Industry Success Factors Technically Skilled Workforce Less Exposure to Key Weaknesses Government Support IT Industrys Future Graduate Availability and Future Prospects The Australia-India IT Relationship Business and Government Links Bilateral Trade Australian IT Investment in India Indian IT Investment in Australia Opportunities Australian Industry Strengths Indian Industry Strengths Assessment The Financial Sector Sector Structure Banking and Finance Insurance Financial Industry Challenges Implications for Australian Investors Telecommunications Overview of the Sector

83 84 85 87 88 89 89 89 91 92 93 94 94 95 95 96 97 99 100 100 100 103 104 105 105 106 106 107 107 107 108 109 111 111 112 112 112 113 113 113 115 116 116 117

P A G E xii

T a b l e

o f

C o n t e n t s

Telecoms Reforms Announced Future Reforms Telecommunications FDI FDI Limits Implications for Australian Investors Health and Education Sector Growth and FDI Health Education Implications for Australian Investors Environment Implications for Australian Investors Biotechnology Media and Entertainment Prospects for New Services Sectors References Appendix CHAPTER 7 OLD ECONOMY PROSPECTS AND OPPORTUNITIES Mining, Oil and Gas Minerals Oil and Gas Foreign Investment Remaining Reform Agenda Opportunities and Prospects Manufacturing Brief Overview Foreign Investment Opportunities Infrastructure Brief Overview Foreign Investment Opportunities Agriculture and Agribusiness Brief Overview Foreign Investment Opportunities Implications References

117 118 118 119 119 119 119 119 120 122 123 124 124 125 125 126 128 129 130 130 131 132 134 135 137 137 137 140 141 141 143 143 144 144 145 145 146 147

P A G E xiii

I N D I A N E W E C O N O M Y, O L D E C O N O M Y

CHAPTER 8

THE STATES PERFORMANCE AND PROSPECTS Indias Diversity Regional Performance Diverging 1990s Economic Performance Better Places to Do Business Business Surveys Favour High Performing States High Performing States Attracting More Investment and Lending Reasons for Success More Developed Industrial and Services Sectors More Outward Oriented Better Infrastructure than Average Better Fiscal Policies Cultural and Historical Factors New Policy Environment Incentives Policy Reforms Reforming States The Second Tier Prospects and Implications The High Performing States Reform Needs Implications for Australian Business References Appendix

149 150 150 150 152 152 152 152 154 154 155 156 156 157 157 157 158 158 160 160 161 162 163 165 165 165 166 166 166 167 169 171

CHAPTER 9

IMPLICATIONS Indian Economic Outlook Implications for Business Implications for Government Trade Implications Development Assistance Prospects

INFORMATION FOR BUSINESS ALSO BY THE ECONOMIC ANALYTICAL UNIT

P A G E xiv

E x e c u t i v e

S u m m a r y

EXECUTIVE SUMMARY

In the last decade, significant structural reforms helped India become one of the world's fastest growing emerging economies, boosting living standards and reducing poverty. Economic liberalisation and rising incomes also stimulated rapid trade growth with Australia and significantly increased Australia's foreign direct investment in India. India is a big, diverse economy with a current growth outlook that overshadows most Asian markets. While the pace of growth in the medium to longer term will depend largely on the speed and extent of ongoing reform, at a time when almost all other Asian economies are anticipating contraction or slow growth, the Indian market cannot be ignored. India has already risen from its position as Australia's twenty fifth largest export market a decade ago, to twelfth largest as we entered the new century. Several fast growing sectors and states provide increasing opportunities for Australian traders and investors to build on that success.

MACROECONOMY AND REFORMS

An early 1990s balance of payments crisis prompted the Indian Government to undertake significant reforms; these opened the economy more to international trade and investment, abolished industrial licensing, floated the exchange rate and increased domestic and foreign private participation in financial markets. Over the 1990s, these reforms considerably boosted productivity, economic growth and living standards, reducing poverty and increasing the number of high income consumers. Since the mid 1990s, a dual economy has been developing in India. Highest growth has been concentrated in the 'new economy' services sectors like information technology, telecommunications and finance. Productivity improvement and output growth in many 'old economy' sectors such as agriculture, infrastructure, mining and to some extent manufacturing has not been as strong. A slower pace of reform in the second half of the 1990s has meant that some key reforms required to boost growth further in these sectors have yet to take place. Despite a slowing in average annual real GDP growth from over 7 per cent in the mid 1990s to between 5 and 6 per cent in recent years, a group of four more outward oriented states in the south and west of the country, Gujarat, Karnataka, Maharashtra and Tamil Nadu, are growing more strongly than the rest of India due to a concentration of new services sector industries in those states. Looking forward, these 'new economy' sectors and high performing states should continue to grow at above average levels. The report considers three potential future growth scenarios. Comprehensive fiscal, labour market, trade, foreign investment, privatisation and government administration reforms could see India return to previous real GDP growth peaks of 7 to 8 per cent per year or exceed them. However, rapid reform is unlikely due to sectional interests resistance to reform; in Indias large decentralised democracy, achieving consensus is difficult. The most likely scenario is continued incremental reform, as experienced in the past few years. Together with reforms achieved to date, this could sustain growth averaging 5 to 6 per cent in the short to medium term. This is in line with Consensus Economics' real GDP growth forecasts, which rate India and China as the two highest growth major Asian economies.
P A G E xv

I N D I A N E W E C O N O M Y, O L D E C O N O M Y

However, a third less probable scenario is possible if significant fiscal and infrastructure shortfalls become more serious and reforms stall; this could see medium term growth dip to 3 to 4 per cent or lower. The current disruption to Parliaments passage of the Governments needed reform legislation increases the risk of this third scenario; however, the most likely scenario remains continued incremental reform over the medium term.

TRADE
In the 1990s, trade reform was Indias most substantial and successful area of economic reform. The Government removed quantitative restrictions on imports, lowered average import tariffs significantly, floated the exchange rate and reduced controls on exports. In response, exports and imports expanded more quickly and the Indian economy is now far more integrated into the international trading system than previously. Opening the economy contributed to gains in productivity and competitiveness and Indian exports now constitute a much higher share of world trade. Despite these important reforms, restrictions on trade remain. Tariffs are still high by regional standards and have recently increased again in weighted average terms. Also, controls continue on a variety of imports, some export restrictions remain in place and business finds customs procedures challenging to navigate. Hence, successful exporting and importing often requires considerable time, effort and investment. Nevertheless, the previously protected nature of many markets means Australian exporters opportunities should increase as import barriers decline. The launching of a new WTO round at Doha in November 2001 augurs well for further reductions in import barriers and an expansion of trading opportunities in the Indian market.

FOREIGN INVESTMENT
Since the early 1990s, India has significantly reduced its controls on foreign investment; FDI surged from low levels as a result. Large parts of the economy are now open to some level of foreign participation, although many sectors still permit less than 100 per cent foreign ownership. Initially, FDI flows responded to the opening of a large new market which had been protected for several decades, often motivated by a desire to avoid Indias high tariff walls. However, over the past five years or so, fast growing new economy services sectors, particularly the information technology, IT, industry and several high performing states are attracting increasing foreign investor interest. Most IT firms supply export markets. The challenging business environment and policy restrictions currently constrain sustained inflows into agriculture and to a lesser extent infrastructure, manufacturing and mining. Due to recent liberalisation, mining, infrastructure areas like ports and niche manufacturing, particularly of high value added products, offer good potential investment opportunities. Australian businesses could benefit from investigating investment opportunities in these sectors and fast growing regions.

P A G E xvi

E x e c u t i v e

S u m m a r y

THE BUSINESS ENVIRONMENT

Many Australian and other foreign companies successfully trade and invest in India. Growing incomes expanding the middle class, gradual liberalisation of the economy, generally low labour costs and the widespread use of English are some major attractors. Despite reforms over the last decade, companies doing business in India face considerable challenges; however, for those who do succeed, returns can be high. Infrastructure, which is in short supply and expensive by regional standards, is a major problem for business. Red tape and transparency issues are significant, intellectual property protection is limited and the court system is pressured by a large backlog of cases. However, a good local partner can assist business in dealings with government and other regulatory bodies, along with facilitating market access. Thorough due diligence is needed before selecting business partners, agents and associates. While India remains a challenging place in which to do business, profitable opportunities exist for experienced and informed traders and investors.

THE AUSTRALIA-INDIA BUSINESS RELATIONSHIP

India accounts for only 1.6 per cent of Australias merchandise exports, but in the decade to 2000, Australian exports to India increased by 12 per cent per year and India moved from Australias twenty fifth to twelfth largest export destination. Resource exports, especially coal and metal products, dominate Australias exports. Continued liberalisation of the Indian economy will increase opportunities for exports of Australian commodities and some niche, often advanced technology, manufactures. Service exports like tourism and education also are growing strongly. While Australian direct investment in India increased substantially during the 1990s, at about A$1 billion, its Indian investment stock is still well under 1 per cent of Australias total overseas direct investment. Faster growing service sectors, including IT, media and finance, mining and niche manufacturing are the main areas attracting recent Australian investor interest.

NEW ECONOMY OPPORTUNITIES

In future, these fast growing new economy sectors, including information technology, IT, finance, telecommunications, health, education, environmental services, biotechnology and media and entertainment increasingly should offer attractive direct investment opportunities. In particular, the Indian IT sector is flourishing due to its strong comparative advantage in relatively low cost skilled IT engineers and supportive government policy. Significant opportunities exist for Australian firms to enhance competitiveness through direct investment in and outsourcing to the Indian IT sector. The financial sector is increasingly open to foreign investment and growing strongly. Although the sector remains constrained by a strong public presence, overstaffing and high non performing asset levels, the Government is working to address these issues. Nevertheless, intending investors need to be well prepared and may find the best opportunities lie in partnering with recent private Indian entrants to these sectors.
P A G E xvii

I N D I A N E W E C O N O M Y, O L D E C O N O M Y

The telecommunications sector also is growing strongly. In the past, frequent policy changes made this a challenging sector to enter; however, recent reforms promise better opportunities for private companies to compete with public incumbents and foreign investor interest in this sector is increasing again. Health, education, biotechnology, environmental services and media and entertainment also are sectors where recent gradual liberalisations and stronger market growth should allow Australian firms with strong capabilities in these sectors to invest profitably; several Australian educational institutions and other companies already participate successfully in these sectors.

OLD ECONOMY OPPORTUNITIES

Among the old economy sectors, manufacturing, mining, infrastructure and agriculture, mining currently is the most prospective for Australian firms. Recently, several progressive states have issued more mining prospecting leases, significantly increasing Australian miners interest in this sector. Fiscal regimes for mining also are approaching international standards, while oil and gas could offer medium term opportunities. While sectors like manufacturing, infrastructure and agriculture are slowly opening to foreign direct investment, foreign ownership caps, infrastructure shortages and government regulation of private sector activity in these sectors has kept foreign investment to modest levels. Nevertheless, several Australian firms are succeeding in the manufacturing sector, usually by bringing high technology processes, skills and products to India. Furthermore, good opportunities exist in private ports and aid funded road projects; at present, these are the most prospective infrastructure sectors for investors and goods and service exporters. In most other old economy sectors, significant opportunities remain contingent on further policy liberalisation and an improving business environment.

THE STATES
Culturally, linguistically and economically, India has always been a highly diverse country. Economic divergence widened in the 1990s, when four southern and western states, Gujarat, Karnataka, Maharashtra and Tamil Nadu, achieved significantly stronger real GDP and per capita income growth than other major Indian states. These high performing states excelled because economic reforms most benefited industry and services in which they specialise; they also are more outward oriented and, in most cases, have better infrastructure endowments. A strong historical focus on education and business and some state policy reforms also assisted their performance. Australian businesses could benefit from this regional divergence by focusing their efforts on those states that are performing better, have better business environments and higher and faster growing incomes; these may offer investors and traders more opportunities.

P A G E xviii

E x e c u t i v e

S u m m a r y

IMPLICATIONS
Indias reforms are creating relevant trade and investment opportunities for Australian firms in a range of fast growing new economy sectors and high performing states; as well, higher incomes and trade liberalisation are boosting Australian commodity, niche manufactures and services exports to India. Further comprehensive reforms would consolidate growth and expand these opportunities further. In the short to medium term, Australian businesses operating in India can expect incremental reforms to continue; in the short term, more comprehensive reform is unlikely given political constraints faced by the central coalition government. Major changes to the business environment also are unlikely in the short to medium term, though some states gradually are reducing red tape and increasing labour market flexibility. Infrastructure shortages are likely to remain acute for some time. Three key messages to emerge from case studies of Australian firms doing business in India are: the crucial nature of business partner choices the need for patience and perseverance in dealing with the bureaucracy the good sales growth prospects for firms which succeed on these first two issues and have a well priced or unique commodity, service or product to sell. India and Australia increasingly recognise they share many common trade and political objectives. Shared trade reform issues include trade in information technology, e-commerce issues, and services negotiations in the WTO. As a large agricultural producer embarking on a process of economic reform and opening, India shares many concerns in common with the Cairns Group of agricultural exporting nations, which Australia heads. Liaison between Australia and India already is well established, and prospects for further development in this relationship are promising. Sharing common democratic ideals and Commonwealth membership, India and Australia also are leading members of the Indian Ocean Rim Association for Regional Cooperation. As Indias reforms deepen, its growth potential is huge. Already Australian businesses are developing many trade and investment opportunities in India and prospects for bilateral commercial relations are bright.

P A G E xix

I N D I A N E W E C O N O M Y, O L D E C O N O M Y

P A G E xx