At the Australia India Business Council forum in Sydney earlier this week, Indian diplomats wondered why Australian businesses lacked enthusiasm about engaging with an economy that is destined to become the world’s third largest within the next two decades.
The simple answer is that for the last 50 years, Australian businesses have found easier opportunities elsewhere in Asia. In the 1960s, 70s and 80s, Japan, South Korea and Taiwan were the preferred customers for Australian commodities such as iron ore, coking coal and thermal coal. China and the ASEAN group joined the queue from the 1980s onward, propelling North Asia and Southeast Asia to the forefront of Australia’s trading partnerships. Investment ties and services followed the trade flows. India was nowhere to be seen, relegated to the “too hard” basket, despite its economy promising so much.
That remains the case today for most Australian businesses, even as India under Prime Minister Narendra Modi markets itself as a “can do” society where international business partners have a mutually beneficial role to play in Modi’s “Make in India” manufacturing initiative. India attracted a record US$65 billion in foreign direct investment last year, but very little of it was from Australia. The salient statistic for risk-averse Australians is India’s “ease of doing business.” It ranks 130th out of 189 countries, according to the World Bank, putting it well behind Australia’s top four trade partners – China, which is ranked 84th, Japan at No. 34, the US at No. 7 and South Korea at No. 4. Significantly, the two small nations that rank 1 and 2 on the World Bank’s “ease of doing business” list – Singapore and New Zealand – sit just behind India in terms of their business importance to Australia.
The Indian story of the last 35 years is one in which hundreds of millions of people have been lifted out of poverty by solid economic growth. But it is also one fundamentally of unrealised potential, held back by a raft of noxious domestic and external factors, particularly when India’s performance is compared with its great rival, China. In 1980, China’s gross domestic product was US$309 billion, according to International Monetary Fund (IMF) data. India’s GDP was US$181 billion, or about 60% the size of China’s economy. Today, the gap is far, far greater. China’s nominal GDP in 2016 is about US$12 trillion, while India’s is about US$2.5 trillion, making it just over 20% of China’s size. Why has that enormous disparity occurred? Part of the answer comes from their different growth rates – the IMF says India’s GDP grew by an average of more than 6.2% a year in the 35 years between 1980 and 2014, while for China the figure was an average 9.8%, including 16 years when growth topped 10%.
China, of course, eschews democracy for a one-party government that controls the economy and directs money into the sectors it chooses. As a consequence, China’s level of communications, road, rail and port infrastructure is far superior to India’s. Its supply chains work, it produces and distributes the energy it needs and it has an industrial and scientific capability of mammoth proportions. The downside is the pollution, the misallocation of resources, the political restrictions, the party cronyism and corruption, the pressure on minorities and the overall lack of human rights for the disadvantaged.
India has always been a rambunctious democracy, save for Indira Gandhi’s rule by decree during the 1975-77 Emergency. There is continual tension between the central and state governments, and between different communities separated by caste, class, religion and race. An urban-rural divide prevails over much of the country, with many farmers still locked in feudal mode and subject to the predation of middlemen and archaic supply chains. Modi has promised round-the-clock “electricity for all” by 2022, but shortcomings in infrastructure, education, workforce training, housing, healthcare and social security make life precarious for 350 million Indian people living on US$1 a day. Add in the security problems arising from borders with Pakistan, China, Bangladesh and Myanmar, plus the threat of internal terrorism from the ongoing Naxalite insurgency, and it’s understandable that India can seem confronting to a business person used to the comforts of Australia. On the ground, the energy and enthusiasm among India’s consuming class is evident, but so are the problems of getting an investment or a business partnership up and running. Corruption is one of those problems, with Transparency International ranking India equal 76th (just ahead of China) out of 168 countries on its index measuring the perceived level of public sector corruption.
For a taste of what business in India might entail, here’s how Austrade describes it: “Facilitation payments also known as ‘speed money’ are a common practice in India for obtaining licences, permits, sanctions, approvals, infrastructure and facilities from government departments and agencies. In some instances, third parties are used by businesses in order to avoid exposing their companies to direct involvement in negotiating bribes with government officials. This business environment poses risks that require proactive management in the form of regular due diligence reviews.”
It all comes down to risk versus reward. India is hitting its economic stride just as growth in China eases, but it offers no easy ride for Australian businesses raised in the relatively sheltered environment of the past few decades, where partners in Singapore, New Zealand, North Asia, Europe and North America have been happy to oblige.
Geoff Hiscock is the author of “India’s Global Wealth Club,” “India’s Store Wars” and “Earth Wars: the Battle for Global Resources.”