India: New Economy Old Economy, the latest report by the Economic Analytical Unit, Department of Foreign Affairs and Trade
Media release from the Australian 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
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
For briefings, and free electronic or express delivered
embargoed copies of the report contact:
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
- 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
- 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
- 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
- the crucial nature of business partner choices
- the need for patience and perseverance in dealing with the
- 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.
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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.