Media release from the Australian Department of Foreign Affairs and Trade

3 December 2001

India: New Economy Old Economy, the latest report by the Economic Analytical Unit, Department of Foreign Affairs and Trade

The Minister for Foreign Affairs, Alexander Downer, will make a major policy statement on Australia's relations with India when he launches the latest report by the Economic Analytical Unit, Department of Foreign Affairs and Trade, India: New Economy Old Economy, in Melbourne on 3 December 2001.

The report highlights how, after a decade of reforms, India's large and diverse economy has become one of the fastest growing emerging markets in the world. India is now Australia's twelfth largest export market, up from between twentieth and twenty fifth a decade ago and Australia's foreign direct investment in India also has risen significantly. While India's medium to long term growth depends largely on the speed and extent of ongoing reforms, its current growth outlook overshadows that of most other Asian markets, which face slow growth or contraction in the next year or so.

The report highlights developments in several fast growing sectors and states which provide increasing opportunities for Australian traders and investors. In particular, several 'new economy' service sectors like information technology, IT, telecommunications and finance are growing rapidly, though opportunities also are emerging in 'old economy' sectors like mining and advanced technology manufacturing. Also, a group of four more outward oriented states in the south and west of the country, Gujarat, Karnataka, Maharashtra and Tamil Nadu, where new service industries are concentrated, are performing more strongly than the rest of India and attracting the bulk of new investment.

The report details case studies of over 30 companies from around Australia which are trading and investing successfully in many Indian sectors and states.

Media representatives are invited to attend, as guests of the EAU, this major India policy statement in Melbourne at a breakfast launch at the Park Hyatt Hotel on 3 December. The report also will be launched in Sydney, Perth, Canberra and Brisbane on 4, 5, 6 and 11 December.

For briefings, and free electronic or express delivered embargoed copies of the report contact:

Michael Growder
A/g Director
Telephone: 02 6261 1101
michael.growder@dfat.gov.au

Frances Perkins
Executive Director
Telephone: 02 6261 2237
frances.perkins@dfat.gov.au

James Hyndes
Deputy Director
Telephone: 02 6261 3440
james.hyndes@dfat.gov.au

NOTES FOR THE MEDIA

India: New Economy Old Economy

INDIA'S GROWTH AND Reform Outlook

  • India has grown robustly since its early 1990s reforms and in early 2001, the Government announced further fiscal, labour market, trade, foreign investment, privatisation and government administration reforms; if implemented, these could return India to previous real GDP growth peaks of 7 to 8 per cent per year.
  • However, since the mid 1990s, governments of India's large decentralised democracy have found it difficult to achieve consensus for further rapid reform.
  • A more likely scenario is continuing incremental reform; together with past reforms and on going trade liberalisation commitments, this should ensure India maintains 5 to 6 per cent growth over the medium term.
  • However, at a time when much of Asia outside China faces slow growth or contraction, India's growth prospects look relatively robust.
  • Due to reforms, India's 'middle class' is expanding rapidly; about 60 million people now live in households with income over A$6 000 per year, compared to only about 25 million in 1994-95.

AUSTRALIA-INDIA BUSINESS

  • Since the early 1990s, Australian exports to India have grown 50 per cent more rapidly than our total exports. Bulk resource and agricultural commodities dominate Australia's exports to India
  • The report includes case studies of successful commodity exporters including BHP Billiton, MIM, AWB Limited (formerly the Australian Wheat Board), Colly Cotton and Scanlan Wools.
  • Service exports like education and tourism also are growing strongly, while IT, environmental, health and media services show promise. Competitively priced higher technology manufactures also are finding markets.
  • Case studies in the report include Monash University, RMIT University, Central College (which all enrol large numbers of Indian students) Australian Tourist Commission, Runge Mining (mining software) Australian Hospital Design Group (hospital design, planning and training), Cutting Edge Post (film editing services), Greenspan Technology (environmental instruments) and the International Centre for Application of Solar Energy (alternative energy technologies).
  • Australia's direct investment stock in India increased strongly during the 1990s, though at about A$1billion it is still under 1 per cent of Australia's total foreign direct investment, FDI, stock. Fast growing service sectors, including IT, media and finance, mining and niche manufacturing are the main areas attracting recent Australian investor interest. (See case studies under new and old economy sections, below).

INDIA'S BUSINESS ENVIRONMENT

  • Despite growing trade and investment, foreign companies in India consider it a challenging business environment. Major problems include infrastructure shortages and expense; red tape and transparency issues, intellectual property protection and the backlog in the court system.
  • Three key messages emerging from the Australian firm case studies are:
    • the crucial nature of business partner choices
    • the need for patience and perseverance in dealing with the bureaucracy
    • the good potential for sales growth and profits if businesses succeed on these first two issues and have a well priced or unique product or service.

TRADE REFORMS

  • Since the early 1990s, trade reform has been India's most substantial and successful area of economic reform; trade now represents about 30 per cent of India's GDP, up from only 15 per cent before reforms. Despite on going trade reforms, India still imposes many restrictions and its average tariffs remain high by regional standards. Nevertheless, Australian exporters are finding new opportunities as import barriers fall in previously protected markets.
  • Interesting case studies of Australian firms which have recently penetrated new Indian markets include Australia-India Fresh Food Alliance and Berri Ltd.

FOREIGN INVESTMENT REFORMS

  • India's gradual economic liberalisation, growing incomes, generally low labour costs and the widespread use of English are some major attractors for foreign investors. Key sectors of manufacturing, mining, infrastructure and software now permit 100 per cent FDI, though many sectors still impose foreign ownership limits below 100 per cent.
  • However, with new FDI under US$2.5 billion in 2000, India still receives low per capita FDI inflows by emerging economy standards. The challenging business environment and remaining policy restrictions constrain sustained inflows into agriculture and, to a lesser extent, infrastructure, manufacturing and mining.
  • Increasingly, fast growing 'new economy' services sectors, particularly the export oriented information technology, IT, sector and several high performing states, are attracting the majority of foreign investment approvals.

 'NEW ECONOMY' INVESTMENT OPPORTUNITIES

  • IN addition to IT, finance, telecommunications, health, education, environmental services, biotechnology, media and entertainment also can offer attractive direct investment opportunities. The report found that since the 1990s reforms, only the service sector has grown more considerably strongly than in the 1980s; manufacturing growth has improved only marginally, while infrastructure and mining have grown more slowly.
  • With total revenue expected to reach about US$11.4 billion in 2000-01, India's IT sector is flourishing; this is due the country's huge pool of skilled, relatively low cost IT engineers and strongly supportive government policy. The software sector is the fastest growing major component of the IT industry; its US dollar measured revenue expanded 46 per cent per year for the past 7 years to reach US$7.4 billion in 2000-01. It now employs about 340 000 people and exported about 70 per cent of its output last year. Although India trains between 35 000 and 50 000 new software engineers each year, with the sector's rapid growth, demand is outstripping supply and skilled staff shortages have pushed up IT engineer salaries by around 20 per cent per year since the late 1990s. This situation will prove a challenge to the longer-term viability of the sector in India, although the Indian government is responding encouragingly to this challenge.
  • Another 70 000 Indian workers now are employed in the even faster growing IT enabled sector (call centres, back office support, data entry, etc); its revenue more than tripled over the last two years. This sector should face less labour shortages, as it has a much larger pool of potential employees to draw from, so may have even stronger growth prospects than software.
  • Case studies of Australian firms successfully developing software in India include ANZ IT and Lumley Technology; representatives of these firms will speak at the Melbourne and Sydney launches (respectively).
  • The financial sector increasingly is open to foreign investment and is growing strongly. While banking has been constrained by a strong public presence, overstaffing and non-performing assets, the Government is working to address these issues. Investors may find the best opportunities lie in partnering recent private Indian financial sector entrants.
  • The report includes a case study of AMP's recent infrastructure fund and insurance joint ventures. AMP's new Indian insurance venture partner and an AMP representative will speak at the Sydney launch.
  • The telecommunications sector also is growing strongly; recent reforms promise opportunities for private companies to compete more effectively with public incumbents and provide services and equipment to this sector; foreign investor interest in this sector is increasing again.
  • Health, education, biotechnology, environmental services, media and entertainment are other fast growing 'new economy' sectors where recent liberalisation 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 are involved in these sectors. The report includes case studies of Baltec Systems, which has established an Indian office to provide environmental technologies to Indian firms; and the joint venture between Deakin University and the Association of Professional Engineers, Scientists and Managers Australia, to offer advanced degrees in IT in India.

'OLD ECONOMY' INVESTMENT OPPORTUNITIES

  • Among the 'old economy' sectors of manufacturing, mining, infrastructure and agriculture, mining, advanced technology manufacturing and niche infrastructure currently are the most prospective.
  • Recent mining reforms are encouraging. India's fiscal regime for mining now approaches international competitiveness, while oil and gas offer medium term potential. Recently, several progressive states issued more mineral prospecting leases, significantly increasing Australian miners' interest in India. 
  • Case studies of Australian miners investing in India include BHP Billiton and mining juniors Grenfell Resources (base metals) and Mineral Deposits Ltd (mineral sand mining).
  • While manufacturing sectors increasingly are opening to foreign direct investment, some remaining ownership caps, infrastructure shortages and government regulation have 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.
  • Case studies of Australian manufactures operating successfully in India include Fosters Group (brewing), Ulco Medical (medical equipment), Clipsal (switches) and Cactus Imaging (high tech billboards)
  • The Indian Government allows 100 per cent foreign investment in many infrastructure sectors, but private ports and aid funded road projects are the most prospective infrastructure sectors for investors and goods and service exporters. Slowly advancing regulatory reform and protracted negotiations inhibit foreign investment in other sectors.
  • The report includes case studies of P&O Ports, based in Sydney, the largest foreign port developer in India and infrastructure consulting firm SMEC International, which operates one of the largest foreign construction consulting services businesses in India.

INDIA'S FAST GROWING STATES

  • The report finds Australian businesses can benefit from focusing their export and investment efforts in the high performing states, whose higher incomes, faster growth and better business environments offer investors and traders more opportunities.
  • Since the reforms started, four southern and western states, Gujarat, Karnataka, Maharashtra and Tamil Nadu, have achieved significantly stronger real GDP and per capita income growth than other major Indian states. While they have only 28 per cent of India's population, these states produce 40 per cent of its output and attract 55 per cent of its local and foreign investment.
  • These four high performing states excel because India's economic reforms most benefit industry and services in which they specialise; these states also are more export oriented and in most cases have better infrastructure than other states. A strong historical focus on education and business and some state policy reforms also helps their performance.
  • A second tier of states, Andhra Pradesh, Kerala, Rajasthan and West Bengal are performing better than the remaining states and could become high achievers over the next decade.

IMPLICATIONS FOR AUSTRALIAN BUSINESS

  • India's reforms are creating interesting trade and investment opportunities for Australian firms in a rangeof 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. In the short term, Australian businesses operating in India can expect incremental reforms to continue; more comprehensive reform is unlikely given political constraints the central government faces. 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.
  • As India's reforms deepen, its growth potential is huge. Already Australian businesses are accessing promising trade and investment opportunities and prospects for expanding commercial relations are strong.