India as an Emerging Market - Essay Example

INDIA AS AN EMERGING MARKET     By Location India as an emerging market Introduction An Emergingmarket is said to be one that is experiencing growth in terms of size and sophistication. It is also a market that experiences drastic changes that are extremely conspicuous as compared to smaller markets (Mobius 2012, p. 2).All middle and low income countries were previously considered to be emerging on the basis of per capita income; where in low capita income levels indicated poor exports while high per capita income levels reflect strong exports. However, this notion has since changed with time, mainly because emerging markets are not as poor performers. This is because currently emerging markets are said to be the driving force the world economy; it is approximated that 80% of the world economic growth has been as a contribution of the emerging markets (Ciravegna, Fitzgerald & Kundu 2014, p. 2). Emerging markets have become the owners of the majority of the world’s natural resources (minerals, oil); they have also contributed greatly to the rising share of global trade and investment. Ultimately, the companies found in these markets have become leaders globally in almost all sectors (technology, food and beverages). Emerging markets seem to be here to stay as their economic and geopolitical existence is based in structural trends that cannot be reversed. Regardless of their fast growth, they consist of a population that is still very poor; all the same this can be bridged through the diverse potential that these markets have e.g. many potential workers, many potential consumers who can get attracted to the new products and markets that have been left under-developed. India’s Industrial Structure India is so far one of the most compelling targets for investment; if anything, it was ranked eleventh in terms of GDP in 2010. GDP being the economic measure of a market reflects that India is doing well as an emerging market. It is estimated by 2020 it will be in fifth place. This growth has been actualized by rising income levels, infrastructure development and a business friendly government. The particular Sectors in India’s Industrial Infrastructure that have been key to the economy are in the areas of: automotive, banking, communications, education and infrastructure. In the automotive sector, India has become quite competitive with the industry having both global and local players. India is an original equipment manufacturer (OEM) of: motorcycles, passenger cars, trucks and others; with major global players like Hyundai, Toyota and Bosch and local participants such as Tata, Maruti, Biston and Sundarm (Sennik & McManus 2011, p. 7). As a result this automotive industry is expected to grow 17% annually in 2010 it had acquired US $ 136 billion and today in 2014 it has reached US $ 160 billion; when all is said and done the local players however usually have the largest shares of the market. The growth in India’s domestic and export automotive markets is often influenced by certain factors such as rising incomes, increasing urbanization, cost competitiveness, skilled manpower, favorable government policies as well as a strong GDP.Therefore, success in the Indian auto market is possible if companies follow a proven pathway. Banking in India has three-pronged regulatory framework: the insurance regulatory and development authority that oversees the insurance industry, the reserve bank of India that often controls scheduled commercial banks, financial institutions, cooperative banks and non-banking finance companies and the last framework being the securities and exchange board of India which often covers mutual funds and capital market intermediaries. India’s banking sector is strengthened by the large sums of cash that come from the household savings. Foreign banks operating in the country also have a positive track record of flourishing through establishing branches in already existing banks. This is because they are unable to stand independently due to existing entry barriers that are as a result of regulations in place. Banks growth in the Indian market is usually upheld by either one of the four different strategies: Organic growth by investing in green-field presence, investing in already existing financial institutions, forming joint ventures with banks already in place or by launching non-bank financial institutions like funds or fund management services. Of all foreign banks Standard Chartered is the largest and most profitable player in the Indian market. Communication as an industrial infrastructure in India continues to experience great growth and remains highly competitive. India’s telecommunication industry, for instance the mobile market has around 14 players in total who continually engage in price wars while consumers continue to look for the most cost-effective mobile service. All the same India has a fixed line and mobile broadband market that is a bit tiny compared to those in developed economies. The mobile handset market is also highly competitive with almost 100 payers all competing to make sales. All the same entries into the Indian telecom market is somewhat quite risky on the basis of the extreme competition that is evident and decline in market due to customer resistance to pay more money for improved technology. In light of handsets, it becomes even more challenging to make an attempt to establish a foreign brand as domestic brands in India are as many as 50 currently. In any case the market can still be penetrated from the data frontier of wireless connections, Third-generation mobile (3G) technologies as well. Education is the other main area of India’s industrial infrastructure; it encompasses both the formal and informal kind of education. India is known to be a heavy investor in Education projects making the sector highly captivating. This because: there is a huge demand for education. All the same the barrier from entry is the lack of clarity regarding Foreign Direct Investment (FDI) and the expensive infrastructure needed. All the same success in the market is attainable through working across value chains to gain scale (Sennik & McManus 2011, p. 13). This means that companies should focus on different elements of the school fraternity wherein one pays attention to preschool and another on private schools. Infrastructure is extremely wide covering areas such as roads, power utilities, airports, railways, sewers, irrigation systems and others. The roads in India are often congested due to the continued growth of passengers resulting in traffic this has invited foreign players to get involved in the road construction works and improvements. All the same Indian roads are of good quality irrespective of the fact that the larger population cannot access these roads. Foreign Direct Investments however, permit the importation of construction materials such as bitumen so as to create tax incentives for rod developers. Drivers in India’s Industrial Structure The significant drivers that have helped in sustaining the five main sectors of industrial growth in India entail: Firstly, the demographic dividend wherein it has a perfect demographic pyramid such that the people in its workforce and those estimated to enter in the near future are around 200 million. Alongside this great labor force is the decrease in the number of dependants up to 45%, this is quite exhilarating because it is estimated that in developed economies; the number of dependants will increase to over 60% which is a bit alarming (Sennik & McManus 2011, p. 3). Secondly, India is in real sense quite a young country, with a median age of 25 as of 2010 as compared to the Triad (USA- 37, Japan- 45). This factor greatly favors India especially in the area of demographic dividends due to the energy, vibrancy and free- thinking that emanates from the young people within this market. The young people are able to come up with new ideas which improve the market as well as put in a lot of their energy in delivering standard work. The workforce is sufficient in comparison to the tasks at hand. The third driver of India’s industrial structure is the fact that it now has within itself a middle-class that has a great level of purchasing power. Estimates point out that by 2015 this class will consist of over 160 million households with a total disposable income of more than US$ 660 billion, which is a great increase from the US$ 322 billion that India initially had in 2005; ten years later, the disposable income would have doubled up. The fourth driver in India’s infrastructural development is the government funding of projects in the market that have fostered great growth; paying for most of the bills for instance, in road and railway construction, new power stations, implementation of irrigation systems and other projects. Meaning that the government adopts policies that accelerate economic development. The fifth driver of India’s economy is the fact that it has highly skilled, trained and talented professionals. India, often adds over 2.5 million graduates to its workforce every other year. This is given as it has several of the world’s best technical institutes; 400 universities, 11,200 colleges and 1500 research institutes. Therefore, in the long run the market never runs out of skilled personnel who can deliver competent services that remain competitive in the economic world. The sixth driver of India’s great economic success has to do with Foreign Direct Investments; the government besides footing projects also creates varying policies and regulations that allow for foreign direct investments in the Country. For instance, one of the FDI’s policies allows 100% participation of foreigners in projects related to construction such as roads and power plants. More to it India has established Special Economic Zones (SEZs) across the country that often allow 100% tax exemption for the first five years and 50% for the next five. SEZs also normally allows duty- free import of capital goods, raw materials, consumables and spare parts at the same time making exemptions from indirect taxes like excise, sales and service taxes (Sennik & Mc Manus 2011, p. 4). However, regardless of all of the structural drivers in its economy; India often faces quite a number of challenges as well Challenges in India’s Industrial Structure India does struggle with a number of interrelated issues that in turn hinder economic progress. One of the greatest issues stems from corruption which results in the delivering of substandard services and infrastructure. India as an emerging market also faces the challenge of an untrustworthy market and demanding consumers; the market often demands that products are of good quality; this appears as a challenge when employers in companies decide to underperform delivering poor services yet the complex labor laws in India make it hard lay off employees. Companies in India, thus have a hard time attracting good Indian talent regardless of its abudance. Another one of India’s challenge is the hierarchical sort of society wherein businesses are dominated by families. Therefore, most businesses have ingrained hierarchies, central decision-making mechanisms and control management philosophies. Businesses and companies that strictly depend on family at the end of the day and not outsiders regardless how skilled or educated. Regardless of the significant talent in India, leadership comes forth as a challenge. Unemployment remains a challenge for this that are educated and for the uneducated but smart lack capacity for growth, thus in need of some sort of empowership. The leadership to create this sort of capacity continues to lack in India; yet if put in place it could result in further economic growth. Macro-economic Indicators of India’s Economy for the last 10 years India between 2004 and 2008 recorded an annual growth of 9% which however experienced a setback in 2008 by virtue of the North Atlantic Financial Crisis (NAFC).This was accompanied by a consolidation of certain macroeconomic indicators like inflation negative GDP growth, fiscal deficits and others. This high growth phase is now said to have been supported by unmatched capital inflows coinciding with an outstanding growth phase in the world economy. After the North Atlantic Financial Crisis (NAFC) India’s Gross Domestic Product (GDP) shot up between 2008 and 2009.However, this rebound was for a short time span as it to a great extent decelerated in the following three years. This deceleration was accompanied by certain disconcerting macroeconomic developments firstly fiscal deficits. All the fiscal consolidations that India had experienced between 2004 and 2008 all suffered a great impede; such that regardless of all the corrections put in place the fiscal deficit between 2013 to date (2014) is still extremely above that of the year 2007.Secondly, the Current Account Deficits (CAD) which was averaged to be less than 1% of the Gross Domestic Product between 2004 and 2008 greatly widened to as much as 5% between 2012 and 2013; however, it has since gone down to as little as 2.3 % between 2013 and 2014 as a result of adopting creative economic policies in the Indian market. Thirdly and last was the high level of inflation that the market experienced; consumer inflation was the order of the day after NAFC. Inflation all the same has since remained persistently high. In 2008 during the intensification of NAFC, India was experiencing large capital outflows which reflect sales by institutional investors in the domestic stock market. All the same, the Indian banking system remained intact as it is often free from the toxic asset showing the prudential regulatory framework in India with regards to banks. It is also said that the reason why the Indian economy has experienced such a slowdown is as a result of the slow global recovery as well (Kapur & Mohan 2014, p. 6). Global growth due to NAFC is said to have fallen from an annual 4.8 % to 2.9%, which in turn affected all economies developed and emerging both. Developed economies have managed to some extent to show improvement in their current account positions; unfortunately, emerging economies like India are still in the struggle. Nonetheless, what is striking about Indi is that it has consistently slowed down and deteriorated economically irrespective of global trends. For instance, India’s fiscal deficit was ranked second after Japan in 2012 which is often a source of future vulnerability of further fiscal deterioration. The benefits and Costs of Emerging Markets and Developed Economies to Invest in each other When a company enters into a foreign market to invest it aims at servicing the local market with a new or improved product or service. Therefore, a Foreign Direct Investment (FDI) refers to the lasting interest of a resident entity of one economy in an enterprise that is resident in another economy. Basically, refers to firms that directly invest in other countries other than their very own. India is one of the emerging market that has been at the top of the foreign direct Investment receiver list, actually being second place after China. Foreign Direct Investment usually has several purposes that entail: satisfying the market that it invests in while gaining more market share, to gain access to natural resources such as cheaper labor or raw material as well as to increase the existing ownership of the firm and to reduce that of their competitors. FDI between developed economies and emerging markets has been rising since barriers to international trade have been consistently lowered. Therefore, with all certainty costs would have to be incurred and benefits experienced as well. One of the benefits of an FDI is when a developed economy invests in an emerging market, increasing the stock of that given market such that in the long run productivity and higher wages are experienced consistently. This serves to benefit both the developed economies the emerging market in as much as the developed economy still gets a fair share of the benefits. This benefit is more pronounced on the basis of the fact that emerging markets experience rapid growth, therefore as the developed economy continues to invest it also continues to grow. One of the risks of a developed economy FDI in an emerging market is based on currency; this is because emerging markets tend to be closed to international trade and development contrary to developed economies. Therefore, the currencies of emerging markets are not often traded in international financial markets. Hence investors face the risk that the exchange rates will move in an unfavorable direction, resulting in magnified losses or reduced gains. In conclusion, India indeed is a fast and strongly growing emerging market that appears to offer an eye-catching opportunity for business organizations that are looking to operate in an emerging market. All the same before foreign investments succeed there is a need for companies to take serious note of the complex social, structural and administrative challenges the market presents. Bibliography Amann, E & Cantwell, J 2012, Innovative firms in Emerging market countries, Oxford University Press, Oxford. Ciravegna, L, Fitzgerald, R & Kundu, S 2014, Operating in Emerging Markets: A guide to Management and Strategy, FT Press, New Jersey Enderwick, P 2007, Understanding Emerging Markets: China and India, Taylor& Francis Group, New York. 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Sennik, R & McManus, R 2011, ‘emerging market entry Candidates: where to invest in India’, Scholarly paper, pp.1-20 Wei, Y & Balasubramanyam, V 2004, Foreign direct investment, Edward Elgar publishing Limited, Massachusetts. Read More