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Market access vs manufacturing

June 26, 2017 | Expert Insights

When Indian Prime Minister Narendra Modi came into power, he vowed to companies and businesses in India and across the world that India will become a far friendlier landscape for investments than ever before.

And now, as the Indian leader prepares himself for a jam-packed visit with lawmakers and business leaders in the United States, there will be pressure on the PM to make good in his promise. Modi too would do his best trying to lure large-scale investment from companies across the board.

Hence, it begs the question – how will the Indian PM deal with business leaders and CEOs who are based in the US?

Background

Prior to 1990, India was seen as an inhospitable environment for companies to do business in the region. This was largely due to the existence of Licence Raj. Between 1947 and 1990, this system made it highly complicated to set up and run businesses in India. Companies had to follow an elaborate system for obtaining licences and then contend with a difficult regulations as well as red tapism. Licences were given to a select few and nearly every aspect of the economy was tightly controlled. It was in 1991, when the Indian government under the ageis of the then Finance Minister, Manmohan Singh abolished this system and thus jumpstarted the economic liberalisation of India. Between 2003 and 2009, India experience a high growth rate of 9% and with a growing robust economy also started attracting investors.

In the recent years Western companies have increasingly lobbied with the Indian government for more market access.

Analysis

Established under the Trade Act in 1974, the US Generalised System of Preferences (GSP) policy is the largest and oldest US trade preference program. It was instated to promote economic growth in developing countries. India happens to be the biggest beneficiary of this program as it allows Indian imports to enter the US duty-free.

However, when it comes to US exports to India, there is little reciprocity. Despite the fact Licence Raj was abolished over 25 years ago, there are still a number of barriers that make it harder for US exports to India. This includes both high tariff and non-tariff barriers and they are imposed in order to protect the domestic market within India. 

Companies have long lobbied for increased market access and more “fair play” within the Indian markets. In February 2017, a group of 20 American companies wrote to the US Congress asking for the US government to negotiate with India to make sure it happens. This will certainly be one of the main points discussed by Trump and Modi when they sit down for their “work lunch”.

Modi for his part will also enthusiastic lobby for US companies to come to India and set up manufacturing bases. However this might be a tall order as many organizations perhaps still view India as a “volatile market”. There has been some success to his Make in India scheme with Apple announcing plans to start manufacturing iPhone SE on a large scale in India. But the scheme cannot be declared an all out success without commitments from companies from across industries and sectors.

Assessment

Our assessment is that it will be a hard sell for Modi to get CEOs and leaders of top US organisations to commit to manufacturing in India and similarly it will be hard for CEOs and the US government to get Modi to lax the rules a bit to make it easier to import to India without the additional costs. If Modi wants to make India look desirable for domestic manufacturing, then he can only do so by developing the necessary infrastructure within the country to support such projects and provide adequate skilled labour, favourable business environment and a cost arbitrage. Given his personality, can he pull it off? Time will tell.