From elephant to tiger: India opens up

07 April 1994 00:00  [Source: ICB]

An unwelcoming attitude towards foreign investors previously forced several multinationals to pull out of India. Now, as the command economy is being dismantled, the time may be right for companies to review their opportunities in the country.

By Caron Lipman

IN THE CRAZE for Chinese and Asia-wide investment, India is often overlooked. Perhaps it is because the country has been struggling with the world's largest democracy - a massive population of 840m or 16% of the world's total - that comments on the country's potential are more often dismissive, along the lines of 'India is too chaotic and bureaucratic', rather than the more optimistic 'India may be next'.

Up until recently the country does not appear to have made multinationals welcome, onlookers comment. The government has been keen on backward integration and companies looking to set up in India have been pressurised to make a strong commitment requiring a long pay-back period early on, something which no firm will do without being able to test out or develop the local market first. Foreign companies wishing to own a majority stake in a local jv have also been subject to limiting monopoly and foreign exchange laws.

A glance at foreign companies' recent attempts to set up in India bears this out. Shell last year sold its 33.3% stake in Nocil, partly because of delays to the planned expansion project (ECN 10 May 1993, page 4). More recently, Hoechst pulled out of the PIL hdPE and rubber chemicals venture, but is now considering a tie-up for hdPE with IPCL (ECN 14 March). Thapar DuPont has been struggling with local opposition to set up its long-mooted nylon 6,6 project (ECN 20 June). And BASF ditched its planned polystyrene project at Mangalore in favour of China (ECN 7 February), although the company may still use Mangalore for dyestuffs and specialities.

ICI India - in which ICI has a 51% stake - has also pared down its investments. Earlier this year, the ICI group announced the sale of its Indian fertiliser operation to the GP Goenka Group, activities which had made up 40% of ICI India's total turnover (ECN 24 January, page 4). Last year it diverted its polyester staple fibre interests into a jv.

But the government's aim towards self-sufficiency - with its focus on import-replacement rather than participation in world trade - has broadened. Following a financial crisis in 1991, the economy has been liberalised with a package of reforms clearly signalling a move away from India's isolated stance.

The command economy is being dismantled. Tariffs are being reduced, on average from 90% to 30%, with a view to a further reduction to an average 25% by 1997. Trading and toll conversions are now allowed, and less government intervention means greater freedom to import, export, invest (now automatic approval for 51% foreign equity), acquire, divest, purchase technology and access the capital market. The latter is now open to foreign investment funds and is expected to be open to all foreign investors in the future.

India's middle class is already as numerous as that of the middle class in the US and it is expected to double to around 300m by the year 2000, fuelling demand for consumer goods and services. A growth rate of 10-15% in international trade is also expected during the rest of the decade.

Many companies who previously pulled out of India are now reviewing opportunities once again. Coca-Cola for example, returned last month to do battle with Pepsi in Delhi. Japanese automobile manufacturers are making their mark. Exxon, which left the market 18 years ago, when the state nationalised its assets, has announced its return with a specialities and lubricants blending and marketing venture (ECN 30 May).

But the opening up of the Indian economy has put pressure on local manufacturers to become more competitive, and a structural shakeup is forecast. Many small-scale companies are likely to merge into larger ones, sources speculate. Closures, however, will be avoided due to restrictive labour laws which make it illegal to make non-management staff redundant. ICI India has managed to bypass the labour law by reducing its workforce by about 20% through a voluntary severance scheme.

The restructuring of India's industry will have to be a gradual process in order to limit labour losses, and the government's cautious approach is justified, ICI India's md, Dr George Ewart believes, because the labour problem could prejudice India's industrial development.

India may not be able to compete with the fast pace of economic development in some of the world's dictatorships, such as China, Ewart admits. But he points out that 'socially and structurally India has a sounder base.' India, he claims, now boasts a fine legal system, a sophisticated financial structure and a good bureaucracy.

'We are very bullish about our growth opportunities in India. No other chemical major is as well positioned as ICI,' Ewart says, adding: 'There is clear evidence of an upturn in the Indian economy and we wish to participate in the growth.'

Following its restructuring, ICI India is upbeat about its future. In May the company announced it had 'substantially improved its performance in all its ongoing businesses' for the year ending April.

'Supported by a 27% increase in the operating profits of the continuing businesses and a sharp reduction in interest charges, gross profit showed a step jump of 54% over the previous year', the company reported while its board announced a recommended increase of its dividend to Rs3/share ($0.09), compared to Rs1.5/share for the previous year.

The company is now concentrating on areas which offer a good congruency with ICI, such as paints, explosives and rubber chemicals. But the company's capital investment programme has stayed at about £5m/year (7.5m) - insignificant in relation to ICI's total annual expenditure. Growth is likely to be in the transfer of know-how into India rather than in an expansion of basic manufacturing. Ewart says this is 'the most efficient use of shareholder funds.'

The company will develop its embryonic polyurethane business in Madras, and it is also positioning itself to enter the Indian acrylics market.

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