Regional Focus: India

India’s Education System Fails to Make the Grade

Posted on January 31, 2013

Education-1Children between the ages of six and 14 belonging to the economically weaker sections of society in India are entitled to free education under the Right to Education (RTE) Act. But going by the Annual Status of Education Report (ASER) for 2012, which was released earlier this month, it may take a lot more to ensure that the quality of education imparted to those children is of acceptable standards.

ASER is the largest annual household survey of children in rural India focusing on the status of schooling and basic learning. Facilitated by Pratham, a Mumbai-based NGO, ASER 2012 covered over 330,000 households and about 600,000 children in the age group of three to 16.

According to the report, around 13% of children in grades one to five could not read at all and around 11% were not able recognize numbers from one to nine. Only 46.8% of all children in grade five were able to read a grade two level text. This number, in fact, has been declining over the past two years from 53.7% in 2010 and 48.2% in 2011. In mathematics, too, there has been a significant drop. In 2010, 70.9% of the children enrolled in grade five were able to solve simple two-digit subtraction problems with borrowing. This proportion declined to 61% in 2011 and 53.5% in 2012.

The report also points out that the decline in reading levels is higher among children in government schools as compared to those in private schools. At present, over 90% of schools in India are either run directly by the government or are government funded. But according to ASER 2012, in the six to 14 age group, enrollment in private schools across the country has increased from 18.7% in 2006 to 28.3% in 2012. The report adds: “If this trend continues, by 2018 India may have 50% of children attending private schools even in rural areas.” In contrast, in the U.S. more than 80% of children attend public schools and in U.K., this number is over 90%.

Talking to the media, Pratham Education Foundation CEO-president Madhav Chavan said that RTE has come to mean “the right to schooling and not to learning and education.” A statement by ASER 2012 notes: “The guarantee of education is meaningless without satisfactory learning. There are serious implications for India’s equity and growth if basic learning outcomes do not improve soon.”

Meanwhile, the quality of teacher training in India is also a matter of huge concern. According to the Central Board of Secondary Education, last year, 795,000 candidates took the Central Teacher Eligibility Test (CTET). More than 99% of these candidates failed to pass the test. CTET certification is mandatory to become a teacher for grades one to eight in central government schools.

Commenting on the shortage of trained teachers, a recent report by Mumbai-based rating agency India Ratings and Research titled, “2013 Outlook: Indian Education Sector,” covering both primary school and higher education notes that “most organizations will find it challenging to comply with the prescribed student-teacher ratio (STR) in the coming years.” The report also adds that although the government’s spending on education in financial year 2012 increased to 3.35% of GDP from 2.62% in 2005, “the infrastructure for both school and higher education needs to be upgraded to provide better quality education and absorb new enrollments.”

Pointing out that quality of education provided by schools is directly related to the quality of its management, T. V. Mohandas Pai, chairman of Manipal Global Education Services and formerly head of human resources at Infosys says: “The quality of leadership in government schools is inadequate and they are very poorly managed. Over the past 20 years, due to political [pressure] poorly educated teachers have been recruited, often with no relevant qualifications. Post recruitment training too is inadequate.”

According to Pai, the fundamental flaw in India’s schooling system is the controls and restrictions implemented by the central and state governments. “It is very difficult to open a new school in the English medium across India, [and the existing ones] are subject to regular harassment and unable to expand freely.” Pai suggests that the only solution to stem further decline in India’s education system is to open it up. “Stop funding government schools and fund the child so that parents have a choice of schools.”

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Indian IT Firms Focus on the Business Case for Diversity

Posted on January 24, 2013

diversityThe IT-BPO industry in India, which established the country firmly on the global map with its outsourcing and offshoring capabilities, is also the largest employer of women in the corporate sector in the country. Of its total pool of around three million direct employees, 30% are women. Pointing this out at the recent Diversity and Inclusion Summit 2013 organized in Bangalore by the National Association of Software and Services Companies (Nasscom), industry leaders and other speakers stressed the business imperative for companies to ensure a fair and equitable environment for their women employees.

At the same time, they were also emphatic that the concept of diversity needs to be all-inclusive and move beyond gender to aspects like differences in physical capabilities, culture, lifestyle, age, religion, economic status and sexual orientation. “We started with a focus on gender inclusion in a formal way in 2007, and much of our attention is still on gender diversity because a lot more still needs to be done on this front. But we are now also focusing on the many other aspects of inclusivity because we realize that a diverse customer base cannot possibly be served well by homogenous organizations,” said Som Mittal, president of Nasscom.

According to Therace Risch, vice president, delivery services technology at Target Corporation, there are two key reasons to drive diversity and inclusiveness in any organization. “One, when an organization has a diverse workforce, it understands the needs of its customers better and makes better decisions for them. Two, when people feel included in their organizations, they produce better results.”

Avinash Vashistha, chairman and manager of Accenture India, pointed out that it is important that organizations put in specific metrics to measure the outcomes of various inclusivity initiatives. “Measurements,” he suggested, “are important because they help us to know what is working.” Target’s Risch, however, added a note of caution. She pointed out that mindset and cultural changes take many years to create a visible impact, and sometimes leaders are disappointed if the results are not quick enough. “There is then a danger that the initiative may get neglected.”

N. Krishnakumar, co-founder, CEO and managing director of consulting firm MindTree, noted: “Organizations must take care that they don’t end up recruiting certain candidates only to meet their diversity targets. At the end of the day, what is important is to assess the potential of every employee and create an enabling environment for them to deliver their best.” Padmaja Alaganandan, executive director, people and change at PricewaterhouseCoopers, added another perspective. She pointed out that it was critical that any measures towards inclusivity should not be misunderstood as preferential treatment. “It is important for [a] business to get the most suitable person for a specific job. What is needed is a performance-based inclusive workplace.”

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Can India’s Ambitious Direct Cash Transfer Plan Work?

Posted on January 23, 2013

cashtransferEarlier this month, the Indian government rolled out its much-touted direct cash transfer plan (DCT). Formally named  Direct Benefits Transfer, the effort aims to plug leaks in the current system, bring efficiencies and transparency to the delivery of social welfare benefits, and replace subsidies with a direct cash pay-out to beneficiaries.

According to a recent report in the business magazine Business India, “A confidential study conducted by the Prime Minister’s Office (PMO) in consultation with various ministries has revealed that, based on the actual money spent by the central government during 2010-2011 under various subsidies totaling Rs. 211,474 crore (approximately $38 billion), the scheme can result in a net saving of Rs. 33,000 crore ($6 billion) by way of plugging leakages.”

But despite the initial hype around the DCT, the actual roll-out itself has been scaled down substantially. Programs covered under the DCT as of now are minor in nature — scholarships and pension plans. The big-ticket items like food, fuel and fertilizer subsidies have been left for later. According to Finance Minister P. Chidambaram, the effort was being launched with “caution” to minimize errors. Talking to the media, Chidambaram said direct transfer of subsidies for food, fertilizer and kerosene “is not being contemplated at present. This will take more time as the issues of entitlement are more complex.”

Also, instead of the original plan of launching the DCT in 51 districts across the country, it has been launched only in 20. Under the new schedule, 43 districts are expected to be covered by March 1. The number of welfare programs expected to come under the DCT has also been reduced from 42 to 26, beginning with less than 10.

The DCT is expected to be fully rolled out by mid-2014. According to media reports, it is estimated that once that happens, cash transfers of around Rs. 300,000 crore (around $55 billion) will happen annually.

Sunil Bhandare, advisor for government and economic policies at the Tata Strategic Management Group, points out that with India maturing into a middle-income country and welfare becoming a growing component of the government’s responsibility, an efficient system to provide social welfare benefits is imperative. “Whatever be the initial setbacks, this is a scheme that has to be implemented,” says Bhandare.

But the big question is whether India’s DCT scheme, possibly the largest of its kind across the world, will actually work? Observers point to many possible roadblocks.

A key pillar of the DCT to prevent diversion and duplication is the government’s Unique Identity (UID) or Aadhaar program under which individuals are being given a unique identity number. The UID Authority of India is scheduled to give UID numbers to 600 million people in India while the rest will be covered by the National Population Registry. But at present only around 220 million have received their UID numbers.

It is expected that under the DCT, the subsidy amount will be directly deposited in the bank accounts of the beneficiaries to plug leakages. But at present more than 40% of the adult population in India does not have access to banking services.

Also, one important aim of the DCT is that the subsidy should be targeted. But it is not yet clear who is entitled for the DCT. “Each line department will [probably] decide on what their welfare measure is, whom it is targeted to and how,” says M. S. Sriram, visiting faculty at the Center for Public Policy at the Indian Institute of Management in Bangalore.

Shinjini Kumar, director at Pricewaterhouse Coopers India, who supports the DCT except in the area of food subsidies, suggests that the scheme can be successful, but for some programs more than others. “Wherever there is no need to rework the calculation — like in the case of old age pension — it can be a smooth transition,” Kumar says. “In such a case the identity of the person has already been established and it is just a matter of improving the efficiency of delivery. But in the case of kerosene and LPG for instance, where the methodology will need to change from giving the subsidy to the supplier to giving it to the user, it could be a challenge. Correct identification of the beneficiaries is also an important piece that needs to be fixed.”

Jayati Ghosh, professor of economics at the Jawaharlal Nehru University in New Delhi, is among the skeptics. Ghosh points out that one of the assumptions of the DCT is that the beneficiary will have an UID that will enable him or her to open a bank account and that the banking correspondent will come around with a handheld device, take his or her fingerprints and hand over the cash. According to Ghosh there are several problems with this model. “For instance, when you are distributing cash, the potential for leakage is very high. Secondly, fingerprints change for people who do manual work and most of our poor are manual workers.”

Ghosh points to other concern areas, too. “This scheme is touted as a way to save money. I find that extremely problematic. The presumption here is that the distribution margins of private players is less than that of the public sector. This is not true. Also, corruption and leakage are political-economy problems and the cash transfer scheme does not address those issues.”

Giving a global perspective is Rajesh Chakrabarti, executive director of the Bharti Institute of Public Policy at the Indian School of Business: “Cash transfers have been widely used in Latin American countries, with Brazil’s Bolsa Familia covering over 11 million families being one of the largest,” Chakrabarti notes. “Mexico, Chile and many other Latin American countries have used it. Kenya in Africa uses it. Closer to home, in Asia, Pakistan has used it for a while, as have Bangladesh and Cambodia. But of course, none of these schemes even come close to the scale that India is talking about.”

JNU’s Ghosh cites more differences. “Cash transfer in Brazil was a success because it was combined with a massive increase in public spending on delivering the actuals. It was not a substitute; it was in addition. Similarly, in South Africa, too, it is in addition to the public provisions. And that’s a critical difference.”

Meanwhile, IIMB’s Sriram adds that the question is not whether DCT will work or not. “It is about the state of preparedness to roll this out and which schemes would be ideally suited for DCT,” Sriram notes. “The main problem I see in the entire scheme is about the lack of last-mile solutions for delivery of cash, which has a clear business case. A business case would mean that the fee provided by the government for rolling out this scheme should be able to cover the costs of the bank as well as the carrier. I am not sure this has been looked into in the detail it deserves.”

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India’s Competition Law Raises Concerns for Multinationals

Posted on January 17, 2013

Red-TapeAt a recent conference of the American Bar Association in New Delhi, participants pointed to several ambiguities in India’s competition law and raised concerns over the process of competition assessment in the country.

One of the key topics of discussion was overseas deals. According to the Competition Commission of India (CCI), if “a combination” formed entirely outside India has “insignificant local nexus and effect on markets in India,” there is no need to file a notice with it. Such transactions are not seen to have “appreciable adverse effect on competition.” A large global transaction becomes “a combination” with “local nexus” if the assets or turnover in India of the parties are higher than the prescribed thresholds — Rs. 7.50 billion in assets (approximately US$140 million at the exchange rate of Rs. 54 to a dollar) or Rs. 22.5 billion (US$415 million) in turnover.

Participants at the conference pointed out that the definition of “insignificant” is not clear. “Once it is proven that a merger or an acquisition results in a combination with local nexus, how do you decide whether that nexus is significant? What is ‘insignificant effect’ needs to be clarified,” says Amitabh Kumar, partner at law firm J. Sagar Associates.

One of the cases discussed at the conference was the April 2012 deal whereSwiss food company Nestle agreed to acquire American pharma firm Pfizer’s nutrition business for US$11.85 billion. Nestle has a large presence in India’s food business and is a leading player in the baby foods segment. India was one of the many countries where the two multinational companies needed the approval of the competition regulators before completing the transaction. CCI cleared the merger on August 1. Its order said the transaction would not have any adverse appreciable effect on competition in India.

While the deal did not face regulatory hurdles or delay in India, participants at the conference were concerned about the process itself. They pointed out that in India, Pfizer focuses only on pharmaceuticals and animal health care and doesn’t have any presence in the baby food and nutrition business. Therefore, the acquisition would not have reduced choices for consumers.

Pointing out that most evolved regulators look only at the impact a combined business or division would have on the market, participants questioned why CCI could not restrict its examination to the impact the merged business or division would have on competition rather than looking at the operations of the two MNCs and their domestic subsidiaries. Some lawyers described the India filing in the case of the Nestle-Pfizer deal as a purely technical one.

Competition lawyers say the problem lies in the wording of The Competition Act, 2002. “The law requires the regulator to assess the impact an enterprise will have on competition. A division, unless it qualifies to be an independent business entity, does not qualify to be an enterprise and that cannot be disregarded by the Commission,” points out Manas Kumar Chaudhuri, partner at law firm Khaitan and Co.

There are other problems, too. Parties to an M&A deal that crosses the specified thresholds are required to give CCI notice within 30 days of signing a definitive agreement. Shweta Shroff Chopra, partner at law firm Amarchand Mangaldas, points out that such a requirement is unusual in the international context. “Most regulators allow parties to file a notice any time before the closure of a deal, but given India’s strict filing timeline, it is important to plan ahead,” she says.

Many regulators also allow companies to file a notice soon after a good faith agreement is reached for a merger or an acquisition. In India, the notice can be given only after a binding agreement has been signed. Failure to give notice of a qualifying transaction between two MNCs can prove expensive — CCI can start suo moto investigations into the transaction any time within one year of the closure of the deal, fine the combination up to 1% of turnover or assets, whichever is higher, and even declare the combination void in India.

Pre-filing consultation has been another area of concern in India. Competition regulators in many countries encourage companies to open a dialogue with the regulator even as they are completing due diligence. Such consultations are useful as companies know within a few meetings if their plans are likely to run into any regulatory hurdles or if they need to amend the proposed transaction. But India’s Competition Act allows such consultation only on procedural issues; it is up to the discretion of the officials at CCI to discuss substantive issues. Also, when discussions are held, the opinion shared is not binding on the Commission.

Despite these problems, however, India’s competition regime is seen to be friendlier than that of China. Competition matters in China are handled by a bureau in the ministry of finance and commerce; it usually takes six months to clear a proposal, and there is no appeal to any decision. In contrast, India has an independent Commission; cases have been cleared in as little as 15 days; parties to an M&A are heard, and appeals are allowed.

Yet, many international transactions that impact domestic markets go unreported to CCI, some for lack of awareness of the reporting requirement and others willfully, because they do not expect Indian authorities to find out.

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Vodafone’s Woes: The Taxman Knocks Again in India

Posted on January 10, 2013

VodafoneThe new year hasn’t brought happy tidings for Vodafone plc. In early January, the Indian government asked the telecommunications giant to pay US$2.54 billion in disputed tax dues. This relates to a six-year-old transaction in which Vodafone had bought Hutchison Whampoa’s Indian operations (now renamed Vodafone India). The Indian authorities are claiming capital gains tax from Vodafone, though the company is the buyer, not the seller. Hutchison has sold its assets in the offshore deal and departed; it is no longer subject to Indian jurisdiction and can’t be pursued for the money.

Just a short while ago, things seemed rosier for the British telecom major. Former finance minister Pranab Mukherjee, who changed the law with retrospective effect to counter a Supreme Court ruling favoring Vodafone, was out of the way after being promoted as President of the country. New finance minister P. Chidambaram had appointed a committee to look into the retrospective tax. The committee – the Shome Panel – had said in a draft report that such retrospective tax should be applied only in the “rarest of rare” cases. People assumed that Vodafone was home free because it wasn’t the “rarest of rare” cases. In fact, the main reason why the retrospective move caused such an international furor was because the taxman was threatening to go after several other similar offshore deals.

As things stand, both sides seem willing to work towards a middle path. The matter can now go for international arbitration if Vodafone so wants, but that process will take time. The Indian government’s finances have gone awry, and it needs additional revenue now. Vodafone, for its part, would like an end to the uncertainly. Business daily The Economic Times quotes a letter to the Indian government from Vodafone International Holdings BV director Erik de Rijk: “…we invite the appropriate government ministers to engage on the issue and would be happy to meet and discuss the matter in an attempt to find an amicable solution.”

India matters for Vodafone because the country is its biggest market in terms of subscribers. It is losing money at a net level. But that is because of huge interest payouts. Vodafone wants to raise equity, thus reducing its dependence on debt. And it wants to raise equity from lay Indian investors. “We want Vodafone to be seen as an Indian company,” says Vodafone India CEO Marten Pieters.

Vodafone India has been trying to go desi in several other ways. Early last year, it appointed Analjit Singh as non-executive chairman to give the company an Indian face. Singh has also been suggesting a negotiated deal between the Indian government and Vodafone plc. (Pieters and others at Vodafone India do not comment on tax issues, as Vodafone India has no role to play in that.)

But the tax issue has to be settled before the Indian company can go for its initial public offer (IPO). The uncertainty means lower valuations. The delay didn’t matter too much as the IPO market was in the doldrums. Now, however, investors seem to have regained their appetite for new issues. This would be a good time to go public.

Meanwhile, the company is not just going Indian; it’s also going rural. The company’s ratio of rural subscribers has been climbing. It was less than 25% in March 2009; it is now closing in on 50%. In September last year, Vodafone India had 72.9 million rural subscribers in a total base of 152.7 million. Its distribution network included 5,578 Laal Dukaans, small rural retail outlets. “We are aiming for the heartland,” says chief operations officer Sunil Sood.

If you want to merge into the fabric of India, you can’t have a foreign parent publicly slugging it out with the government. India on its part can’t afford to have Vodafone as a constant reminder to foreign investors that it can change the rules of the game midway. It should be in the interests of both sides to make peace.

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Stemming the Tide of Imported Gold in India

Posted on January 3, 2013

The Reserve Bank of India (RBI) and finance minister P. Chidambaram are focusing on gold as a cause of the country’s deteriorating macroeconomic numbers. The current account deficit has been widening, and gold is the second biggest contributor to the import bill after crude oil.

“There is a need to moderate the demand for gold imports considering its impact on the current account deficit,” says the draft report of a RBI working group on gold, released on January 2. In New Delhi, in a simultaneous development, Chidambaram told the media that the government would have to revisit the import duty on gold, to make the yellow metal more expensive. The duty is currently 4%. “Demand for gold must be moderated,” he said. “[We] cannot afford to spend so much on importing gold. Nobody says gold within the country should not be used for whatever purpose. There is enough gold within the country. But import of gold is a huge strain on the current account.”

In the first half of financial year 2012-2013, the current account deficit was US$8.7 billion, 4.6% of GDP against a comfort level of 2.5%-3%. Gold imports stood at US$20.25 billion. Chidambaram estimates that the full financial year will see gold imports cross US$40 billion.

Gold has always been the favored form of investment in India. Even the poorest families have some gold saved away for a rainy day. “India is the world’s largest gold consumer market,” says a World Gold Council (WGC) report titled “India: Heart of Gold.” “Unlike other gold markets, the love for gold has not only spread across many generations but also across all social strata.”

India and China are the two biggest markets for gold in the world, accounting for more than 25% of total demand. China was expected to overtake India, but that hasn’t happened. In the July-September quarter of 2012, global gold demand was 1,084.6 tons (valued at US$57.6 billion), down 11% from the corresponding period the previous year, according to WGC figures. Demand in India was up 9% to 223.1 tons. In China, however, demand fell 8% to 176.8 tons.

The RBI has suggested various ways to temper Indian demand and to use gold more productively. The draft paper says that fiscal measures may be revisited, which in lay language means that import duties should be raised. The problem, as the paper points out, is that “purchases from unauthorized sources of supply” — smugglers, in lay language — will increase. C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, recently pointed out that banning gold imports will push up smuggling. He said that there were already signs of that happening. The government had hiked the duty on gold imports in January 2012 from a flat Rs. 300 (US$6) per 20 gm to 2% of value. This was further increased to 4% in the Union Budget.

According to Rangarajan, gold is primarily a hedge against inflation. When inflation comes down, so will demand for gold. The RBI paper goes a step further. It suggests the introduction of inflation-indexed bonds to wean away gold hoarders. It has also suggests several gold-backed financial products.

Gold has seen much activity in India in recent times. Earlier, it was mainly jewelry that was in vogue. Now, banks are doing good business selling gold coins and bars. Various specialized non-banking finance companies (NBFCs) have sprung up offering loans against gold and gold jewelry. These were looked upon with suspicion because of the many complaints against them. The draft paper gives them qualified approval. “Banks and NBFCs may continue to deliver gold jewelry loans, which monetize the idle gold in the country,” the paper says. “The gold loan market has grown well in recent years. It is time for consolidation of the operations of the gold loan NBFCs. [They] need to transform themselves into institutions free of complaints, [with] proper documentation and auction procedures, [and a] rationalized interest rate….”

The paper is, in fact, more concerned about the gold NBFCs than gold imports. Though it is dotted with caveats, the draft has been welcomed by the industry. “The committee’s report on the gold loan sector is very positive,” says George Alexander Muthoot, managing director of Muthoot Finance, one of the few listed companies in the sector. Muthoot shares shot up nearly 20% on the Bombay Stock Exchange on January 3.

“The release of the report will remove the negative perception created in the market about the gold loan business,” continues Muthoot. “Apart from suggesting some hygiene factors to be inculcated, the gold loan companies’ role in monetizing and creating liquidity for the gold available in the country has been appreciated in the report. This report has also concluded that gold loans have no impact on gold imports.”

In the first wave of liberalization, Manmohan Singh, then finance minister and now prime minister, had removed curbs and duties on gold imports. In the new burst of reforms, his successor Chidambaram is bringing them back.

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Foreign Companies Hone New Strategies for Indian Manufacturing Operations

Posted on December 21, 2012

Indian companies aren’t investing. The cost of money is too high; in its latest policy announcement on December 18, the Reserve Bank of India (RBI) maintained its benchmark repo rate (the rate at which the RBI lends to banks) at 8%. This was despite the official GDP forecast for 2012-2013 falling to 5.7%-5.9%, the lowest in a decade. Lower interest rates are necessary to induce companies to borrow money for investment purposes.

Big ticket foreign investments like Walmart and IKEA are still waiting for clearer rules. Besides, though foreign direct investment in multi-brand retail and aviation has been approved by both houses of Parliament, there is still considerable local opposition. No company wants to enter the country to find its stores attacked by political parties, as happened earlier with KFC.

So is the India manufacturing story – described by McKinsey & Co as a US$1 trillion opportunity by 2025 – running out of steam? Not really. While the big companies are putting projects on hold, smaller players are filling the gap.

There has been a subtle change in the purpose of these projects, however. Until recently, India was looked upon as an outsourcing base for items as diverse as auto components and fabrics. Today, the focus is more on the domestic market.

“Local manufacturing and local services are the best way to cater to the Indian market,” says Piyush Shah, managing director of Hitachi Hi-Rel Power Electronics. Hitachi, a Japanese global electronics major, has opened a new factory in Gujarat at an investment of US$11 million. This is part of Hitachi’s US$1 billion investment plan in India.

The URB Group, one of Europe’s biggest manufacturers of bearings, has announced its first manufacturing foray in India (in Rajasthan) at an investment of US$66 million. This will be its first factory outside Europe (the others are in Romania, Turkey and Hungary). URB has had a marketing presence in India since 1982. “We will be able to sell our bearings at much lower prices to manufacturing companies in several sectors,” says Harun Adiguzel, president of URB India.

Amway India, a direct-selling FMCG (fast-moving consumer goods) company, plans to set up its first manufacturing facility in Tamil Nadu at a cost of US$100 million. The company has been sourcing some 97% of its needs from third party contract manufacturers until now.

Focusing on the domestic market means that products have to be localized. To use a very basic example, electrical devices have to be configured to a 220 volt input instead of the 110 volts that is the norm in some other countries. When the Indian market wasn’t very important, foreign companies expected consumers to buy a step down adapter to be able to use the foreign model in India. Now products are being made specifically for India.

This is the other big driver in the invest-in-India movement. “India is a very diverse market in terms of consumer choices and preferences,” says Krishan Sachdev, managing director of Carrier Midea India. “This makes product localization an integral part for a consumer brand like ours. A local manufacturing facility gives us the flexibility for new product development and to quickly respond to the market dynamics. Besides, localization also helps with cost economies and reduces exposure to [foreign exchange] fluctuations.” Carrier Media is a joint venture between U.S.-based Carrier Corp. and the China-based Midea Group. It recently inaugurated a new manufacturing facility in Haryana with an investment of around US$100 million over a five- to six-year period.

Panasonic India has a similar focus on localization. “[We want to integrate] Indian expertise into our product design and manufacturing processes,” said Daizo Ito, president of the Indian subsidiary of the Japanese MNC, in a recent press statement. Panasonic has opened a technopark in Haryana to manufacture air-conditioners, washing machines and certain industrial products. The investment planned in this facility is around US$200 million.

Export remains a long-term ambition, however. At URB, 70% of the production will be for domestic use and the remaining 30% for export. The target is to take this to 50:50. Panasonic is looking at exporting 5% of its production by 2013 and 20% by 2015. “Lower cost of production and the ability to provide best-in-class quality is also putting India in the forefront of export markets,” notes Shah of Hitachi.

The export strategy comes in a new form. India is being regarded as a local manufacturing hub. Panasonic India will target the Middle East and Africa. Shah is looking at Southeast Asia, Africa and the Middle East. URB is a little more ambitious: It is eyeing the European and the U.S. markets as well. (The others already have bases in the West.)

Export is the icing on the cake. The domestic market remains the key driver for the foreign investments in manufacturing. “With the emerging middle class, increased disposable incomes and low level of product penetration, India holds very strong growth prospects,” says Sachdev of Carrier.

Kumar Kandaswami, senior director at Deloitte India, gives a macro view. “The per capita consumption in India is low,” he says. “There is a lot of headroom for growth. For instance, while India has about 10 cars per 1,000 [people], China has over 50. As increasing numbers of people come into the zone of employment and consumption, demand will be further fuelled. Going [forward], consumption-driven manufacturing looks strong. In Europe, demand is dwindling, and in the West there’s a slowdown. Companies are now focusing on regions where demand exists; they want to localize and make themselves responsive and relevant by setting up manufacturing units to cater to these regions.”

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Foreign Restaurant Chains Go Local to Grow in India

Posted on December 13, 2012

Cafes and small restaurants in downtown Mumbai are doing brisk business these days. Owners were worried when, in mid-October, Starbucks opened its first India store nearby. They feared that business would move to the iconic U.S. brand.

A strange thing happened, however. Demand for Starbucks was high. People came from all over the city and stood in long queues outside the outlet. But some gave up and tried out the neighboring eateries instead. The Mumbai edition of morning newspaper The Times of India reported that “the coffee shops and restaurants in [Starbucks'] radius have become the beneficiaries of its stardust, leading them to jokingly attribute their sudden business to these ‘refugees’ (some call them Starbucks orphans).”

Starbucks and its neighboring coffee shops may be experiencing an uptick in business. But the same is not true of the quick service restaurant (QSR) sector in India. Though the nation’s economy has perceptibly slowed down — GDP growth in the quarter ending in September fell to 5.3%, the lowest in 10 years — this was not reflected in the crowds eating out. Over the past few weeks, however, circumstances seem to have changed. According to Samir Kuckreja, president of the National Restaurants Association of India, growth has slipped from 15% to 10%.

Feeling the pinch most are the foreign brand names that have come to India in recent times. Their cost structure is higher, but they can’t afford to scare away customers by charging too much of a premium. The chains are competing with sellers of local snacks like vada paav (a potato fritter in a bun) or the ubiquitous south Indian sambar vada, which are available at 50 cents a plate. Apart from cutting costs in every possible way, the companies seem to have hit on the same strategy — go ethnic. They are following in the footsteps of McDonald’s India which has been a big hit with its McAloo Tikki.

Dunkin Donuts, which opened shop in Delhi a few months before Starbucks, started with some additional local flavors on its menu. Now it has introduced more exotic toppings, such as Kesar Pista, Petal Jamun and Coconut Burst. The chain is selling a gift pack of these flavors for around $6. Close by is premium ice-cream brand Haagen Daz, which entered India in 2009 with banners outside the Delhi outlet that seemed to indicate that Indians weren’t welcome. “Exclusive preview for international travelers,” read the banner. “Access restricted only to holders of international passports.” Today, however, Indians and Indian flavors rule the roost at the ice-cream vendor.

Meanwhile, McDonald’s has announced that it will open all-vegetarian restaurants. Subway, too, has started several vegetarian outlets. “At Subway we take pride in being able to adapt our menu to honor local religious and cultural food preferences. Our menu in India includes many items that were specifically selected to appeal to the India taste palate,” says a Subway spokesperson. Among the offerings: paneer tikka (cottage cheese) and corn and peas sandwiches. Many Indians are strict vegetarians.

Opinion is divided on whether such brand dilution will have a negative impact in the long run. Some say that food is an area where it is very difficult to change habits. The only way to induce customers to try something new is to give it a familiar form. A donut with a rasogolla in the middle may seem a conceptual horror. But it is sure to attract the otherwise parochial Bengali, some observers suggest.

Jagdeep Kapoor, who has written more than 20 books on branding, says that foreign brands have the image. But in this industry, it is also necessary to develop trust. The name and the aura of an American brand are necessary to get the first customers in. But after that, they could well call themselves Jumpin Coconuts, for all the customer cares, he notes. There are other important factors to keep in mind: For example, Indians prefer their food to be fresh. “Look at the date and not the rate,” he says.

At Starbucks too, when more outlets open, the mob scenes seen outside the Mumbai store will likely cease. Will the Starbuck refugees return to the high-priced (by Indian standards) chain? Will Starbucks be forced to serve Indian coffee? Food for thought: The Starbucks in Mumbai currently offers a basil tomato and mozzarella cheese sandwich and blueberry muffins; but it also sells a Tandoori paneer roll, an elaichi mawa croissant and a murg tikka panini.

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