Published: March 01, 2011
Talk of the ‘BRIC’ countries, an acronym much loved during the early noughties, is now all but dead. Indeed, it seems incongruous, even absurd to try to generalise about four countries whose cultures, politics and economies are so different. With its newly awarded second place on the economic leader-board, China now tends to dominate discussions on economic growth in major ‘emerging’ economies. Indeed, were it not for the significant imbalances that remain, there is little justification for referring to China in this way.What the focus on China tends to obscure, however, is the largely untapped potential that exists in India. With the world’s second largest population (four times greater than the United States) and the seventh fastest growing economy in the world, it would be a travesty for multinational corporations to ignore India, or to sideline the country by giving preference to its eastern neighbour.
Despite ‘BRIC’ becoming an anachronism, India is still frequently compared to China, and this comparison is often unfavourable. I visited India for the first time late last year from China. Based on my brief and subjective experience, I can only conclude that anyone trying to make such a comparison has never been to both countries. Perhaps the only common factors I would identify are the huge numbers of people, bicycles and cars. Beyond that, two countries could hardly be more different. India was, for me, a country dominated by contrasts: faded colonial buildings and dirty streets juxtaposed with colourful decorations and clothing; the happiest, friendliest people I have ever met enduring grinding poverty; enthusiasm and motivation combined with a consciousness of community responsibility. India undoubtedly lacks the planned approach to infrastructure and urban development that China has witnessed over the past 20 years, but just because its growth has been a little slower, and perhaps more haphazard than that of China, the opportunities should not be underestimated.
There are a number of elements that are contributing to a very bright future for India. Dinesh Khanna, Regional Head of Transaction Banking, South Asia, Standard Chartered Bank summarises some of the factors that are continuing to fuel growth in the country,
“India has very favourable demographics.Over the next two decades, India will see a working population of close to 220 million, with the relative advantage of English language skills, education, links to Europe and North America, free trade agreements with Asia and a head start in R&D and software development, assisted by supportive legislation.In addition, we see that Indian growth is run on the twin engines of consumption and investment,which provides balance.This resulted in India demonstrating significant resilience to the crisis.”
Government initiatives are also helping to add momentum to economic growth. Exchange controls that had restricted the flow of capital have been relaxed in order that India can become a more significant global player, and encourage greater investment in infrastructure. Licensing has now been abolished in all but the most sensitive industry segments, making it easier to do business. Consequently, India has a strengthening private sector, which is encouraging increased productivity and professionalism through greater competition. Crucially, Indian conglomerates such as Tata Group are taking a lead role, in addition to foreign multinationals. Tata Group has a strong reputation for ethical business and corporate responsibility to employees and communities, which will be an increasingly important factor for companies working in India, in order to raise standards for people across diverse income levels, discourage the sweatshop culture that will hinder growth, and therefore create a larger and more affluent consumer base. [[[PAGE]]]
Although a massive issue in itself, poverty is not the only challenge facing India, however. Inadequate physical and social infrastructure, limited non-agricultural employment opportunities, and insufficient access to education for the less affluent, particularly rural population, and rural-to-urban migration will all continue to remain hurdles to India’s future development. Dinesh Khanna, Standard Chartered Bank explains that inflation also remains a concern, although levels are widely anticipated to fall from 8.3% in January to 7% in March 2011,
“Having raised rates seven times since March to tame inflation, the central bank paused in December but indicated further rate hikes were possible, with inflation remaining well above its comfort zone of 4-5%.”
Although the government has outlined major infrastructure plans, exceeding $1tr in value, that will enhance communications in India fundamentally, Dinesh continues,
“Despite ambitious infrastructure development plans, there will need to be sufficient financing available to achieve them. In addition, there is still a lack of confidence in governance in India.”
With a coalition government in India elected democratically, the rate of change, and therefore potentially of growth, is inevitably slower than a state with more permanent government control and fewer competing political influences; however, as Rajiv Jain, Head of India and South Asia, J.P. Morgan Treasury Services emphasises,
“Companies are increasingly recognising the momentum in India’s growth, and the government’s intention to maintain or exceed current rates of growth. Consequently, we see our clients expanding their operations accordingly to take advantage of this.
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Licensing has now been abolished in all but the most sensitive industry segments, making it easier to do business.
While India has appeared on many companies' radar, in many cases this has been as a location for call centres, shared services, outsourced and back-office functions such as software development, leveraging Indai's English language skills and an educated workforce in centres such as Hyderabad, Bangalore and Pune. However, as Rajiv Jain, J.P. Morgan continues,
“It is no longer the case that India is a centre for services and China for manufacturing. Although services still account for around 60% of GDP, manufacturing is expanding rapidly, with around 70% of manufactured goods now exported. There is considerable potential in the country for all industrial sectors, not least energy, infrastructure, media, healthcare, auto and telecoms.”
This rebalancing of industrial activities is also important from an employment perspective, as agriculture and services alone will not be able to absorb the growing workforce.A related challenge, however, will be how to avoid the proliferation of the sweatshop culture which has been such a negative feature in the textile and clothing industry, and the use of harmful chemicals for agriculture and manufacturing processes.While awareness of such abuses has increased in many western economies, with growing demand for naturally sourced, organic and fairly traded goods, India’s trading partners are increasingly in other parts of Asia,particularly China, central and eastern Europe and Africa where public awareness and priorities may differ.
Based on India’s growth to date, and huge future potential, many treasurers have already had to consider how to manage the company’s financial requirements in India, and this obligation is likely to increase in the future. There are some challenges when managing cash and liquidity in India. As Rajiv Jain, J.P. Morgan outlines,
“Cash and treasury management processes are still hampered by paper-based clearing systems, to which treasurers more familiar with the financial infrastructure in Europe or North America are not necessarily accustomed. However, we have seen rapid change in recent years, with the Reserve Bank of India actively promoting electronic payments and collections. For example, 80% of large value payments (by value) are now electronic, and we are also seeing considerable growth in the automation of smaller value payments, which has already reached 20% by volume.”
Dinesh Khanna, Standard Chartered Bank continues,
“The regulator has taken steps to move to a uniform and centralised electronic infrastructure and the results are encouraging.The rapid growth of real time gross settlement, national electronic funds transfer, coupled with new initiatives of the National Payments Corporation of India in the areas of mobile payments and cheque truncation promise much easier and more efficient cash management in the future.Banks with a high technology and process quotient have also led the way in keeping up to date with changes and delivering the benefits of a faster and efficient payment and settlement mechanism to their customers.”
In such a large country, the extent of a bank’s branch network is an essential criterion.
The move to electronic payments will bring further advantages than simply efficiency. As Dinesh Khanna, Standard Chartered Bank continues,
“For companies growing their business in India, reaching out to business constituents (both suppliers and consumers) is the most pressing need.India’s vast geography, multiple forms of clearing, varied cash management landscape and changing regulations introduce a range of challenges from a cash and treasury management perspective.”
For example, electronic payments will enable greater reachability to suppliers and customers across India’s vast territory Information availability and reconciliation will be easier and cash will be better controlled.In addition,cash management structures that are popular in other regions, such as cash pooling become more relevant as payment finality become more timely.Liquidity management techniques that are popular in other regions, such as notional pooling, are not yet possible in India, but we are likely to see greater sophistication in this area in the future.[[[PAGE]]]
Currency exchange is also a challenge, as described by Rajiv Jain, J.P. Morgan,
“The Indian rupee is convertible on the current account, so payments for all permissible imports and exports can be transacted through commercial banks without central bank approval, and therefore without unnecessary delay or administration.Whereas the rupee is not fully convertible on the capital account, there has been considerable liberalisation of currency and fiscal controls.”
Rajiv Jain, J.P. Morgan concurs:
“In reality, doing business in India is not difficult. From the perspective of cash and treasury management, India can be considered on a par with other Asian countries which face a similar set of challenges.With significant developments at a regulatory level, and a rapid shift to electronic settlement, the future looks brighter.”
In consequence of some of the restrictions that have yet to be relaxed, few companies have yet based regional treasury centres in the region, as Rajiv Jain, J.P. Morgan notes,
“Although there are numerous financial shared service centres in India that act as processing hubs across the region, there are still few regional treasury centres based in the country, largely due to outstanding regulatory restrictions, such as the prevention of notional pooling, the lack of full currency convertibility and tax incentives. However, as the Indian financial markets continue to open up, we expect to see a lot of interest from companies looking to establish an RTC in the future.”
In addition to regulatory and tax incentives, the banks will ultimately have a significant role to play in making India more attractive as a financial hub for corporations. Rajiv Jain, J.P. Morgan outlines,
“Not only does J.P. Morgan support the cash and treasury management needs of foreign companies with business in India, but we are also actively engaged with Indian corporates and financial institutions that are seeking to expand overseas. Due to our global footprint and significant presence in each market, we are able to provide local expertise in the markets that are important for them, and to align their domestic and international strategies.”
For Standard Chartered too, as well as other major international banks with a strong presence in Asia, there is a strong focus on India. Dinesh Khanna, Standard Chartered Bank describes,
“Standard Chartered has been active in India for over 150 years and has established itself as the largest foreign bank in the country. Pivotal to our offering is a comprehensive product suite across payables, receivables and liquidity management,supported by a competitive technology offering. For example, as current accounts are non-interest bearing, we are supporting corporates in their liquidity management needs with solutions such as automated investment into money market funds, fixed deposits and cash sweeping to maximise return on surplus cash and reduce the cost of borrowing.”
In such a large country, the extent of a bank’s branch network is an essential criterion, which is often achieved through partnerships, such as Standard Chartered’s exclusive relationship with the State Bank of India, in addition to the bank’s own network of 94 branches, together with 20 further banking partners and a rural network of microfinance institutions.
There are other factors too in achieving success in cash and treasury management in India. As Rajiv Jain, J.P. Morgan highlights,
“As with any new market, treasurers building or expanding their activities in India need to work with a partner bank that understands their aspirations,risk appetite and business culture, together with the challenges of the local market.”
The critical challenges that India faces are debilitating but not fatal. Poverty, the crisis of governance, political paralysis, food and energy insecurity, and insurgency over the border in Afghanistan and Pakistan are all frequently cited as the factors that could extinguish the economic growth that India has seen in recent years. Eswar Prasad, Professor of Economics at Cornell University gave one perspective in the Financial Times, January 27 2011,
“Today’s policy choices will determine whether this growth surge remains sustainable or fizzles out. Finance holds the key to achieving India’s long-term growth potential. As the economy becomes larger, more complex and market-oriented, the financial sector will play a crucial role in underpinning growth by channelling domestic and foreign capital into productive investments. Increasing access to the financial system is also a priority for making growth more balanced and sustainable, from both economic and social perspectives.”
Banks undoubtedly fulfil a very important function, as does the Indian government and the central bank. However, corporates too have a role to play in coaxing India towards fulfilling its potential, not least because of the longer-term commercial advantages of doing so. This could include investment, using influence with the government and financial institutions, and promoting a responsible attitude to the environment, employment and the communities in which they operate.While treasurers and finance managers are typically not able to influence companies’ environmental, ethical and community practices, they are in a position to select banking partners that are investing responsibly and actively in the country, and to promote internal financial practices that encourage efficiency, control and good governance.
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