Business Climate Survey Project- Armaan Grewal & Anya Bharadwaj

Project Background• Project is based on information collected from Business

Climate Surveys (2008-2013) answered by Swedish companies operating in India

• Conducted by the Swedish Chamber, the objective of Business Climate Survey’s (BCS) are - • Gather thoughts of Swedish companies doing business in India• Understand business climate perception in India by these

companies• Help in future establishment of Swedish companies in India

• Project team is Anya Bharadwaj & Armaan Grewal as handed over by Sara Larson of the Swedish Chamber

Project Description• This project has the following aims –• Highlight major concerns and advantages faced by Swedish

companies doing business in India • A trend report of the main business risks and the areas of

concern over the years pointed out in the BCS • Study policies, governmental structure & events to explain these

trends• Forecast the future scenario on the basis of the changing

government and their promised mandate• Identify possibly emerging trends and the affect these may have

on Swedish companies

Approach• The findings and documents provided prior to this project were the Business

Climate Survey’s (BCS) of Swedish Companies in India for the past 6 years (2008-2013). Using this information and through extensive research the following information was compiled and observations were made regarding the present and future business climate in India for Swedish companies. • Through this study and analysis of the BCS the main areas of concern (as identified by

Swedish companies doing business in India) were noted and these were categorized• Based on the identified trends and perception of the Indian market by Swedish

companies various conclusions were drawn. • Next, a close look was taken at the policies of the Indian government and how these

possibly influenced or resulted in the identified trends. • Next, a study of India’s new BJP led government, their policies and recently announced

budget was done to understand the possible changes India’s business environment.

• This helped gain an insight as to how the activities and ease of doing business for Swedish Companies in India would change. Applying of the new laws and predicting the changes in trends led to conclusions being drawn for the future Business Climate in India.

Challenges & Advantages• Corruption, red tape, the uncertain tax regime and deficient

infrastructure.• An added benefits to doing business in India is cheap and

talented labor force and lower production costs.• Swedish companies mentioned various competitive

advantages that they hold over domestic producers in India like product design, quality and superior technology, brand name and better management.

Favorable Sectors/Activities

• Swedish companies are majorly involved in life sciences, engineering, medical, auto, IT and telecom.

• This changed slightly post-2011 with changes in Indian regulations, like FDI

• More and more companies involved in trading and services industries• Main activities were marketing and sales but companies were

increasingly involved in production activities

2008 2010 20130%

5%

10%

15%

20%

25%

30%

35%

% of Swedish Companies Involved in Production Activities

Drivers to enter Indian Market• Steady increase in the number of Swedish companies in India as

they doubled between 2006-2010.• B2B and B2C demand are the main factors that attract Swedish

companies to India• In 2013, close to 20% identified low cost production as main

driver for business in India• Given the government’s future plans, the business climate in

various sectors should improve further attracting Swedish companies

Business Climate Perception• Perception of Indian business climate has decreased from 2010

onwards• With India shielded from the global economic crisis prevailing in 2008-

10, Swedish companies operating in India were less impacted• The Indian economic crisis from 2012 onwards resulted in high prices,

import controls etc. impacting business climate

2008 2009 2010 2011 2012 20130

2

4

6

8

6 6.47.6 7.4

5.4 5

Business Climate Perception By Swedish Companies in India

Years

Ratin

g (1

-10)

Change in Governance

UPA

NDA

BJP-led government

1. Pro-industry2. Single window

clearances3. Open market to

foreign investors4. Emphasis on policy

reform Thus, business climate in India to potentially improve

Indian Market• When talking about B2B and B2C consumer demand in India it

is safe to say that in the coming years this is going to continue to increase significantly.

• At present, 100% FDI in B2B e-commerce is permitted however not in B2C e-commerce.

• Although the BJP has spoken publicly about its opposition to FDI in multi-brand retail, the government has decided against reversing the 51% limit for FDI in multi-brand retail. This will come as a relief to Swedish retail houses planning to enter the Indian market as it was

• The government has also opened up FDI opportunities in the railway sector. This again provides opportunities to Swedish companies looking to invest in this area.

Changes in FDI Policies

Labor Laws

• Proposed changes by BJP will allow industries to hire apprentices more easily.

• India has just 300,000 apprentices. This reform will help incorporate up to 10 million youths and develop them into job ready individuals. The proposed reform will see the state bear half the cost for firms with less than 250 workers and hiring apprentices. Above this ceiling it will absorb 1/4th of the cost.

• The ministry of labor recently announced that the government is also exploring how to revamp the vocational training and national career service. This bodes well for the future and labor laws are sure to be relaxed in the coming months.

Employment• Employment of Indian workers by Swedish companies increased

four-fold and Swedish workers in India doubled from 2005-2010.• By 2012 more than 75% of companies had 250+ workers• Swedish companies also created close to 300,000 indirect

employment opportunities as of 2012.• Given the change in labor laws and enhanced vocational training of

labors, they will continue to increase employment

Bureaucracy

Corruption

• Experienced during

interaction with public officials and agencies

which makes it hard to setup or expand business.

Delays

• Many approvals needed for

foreign companies

including FDI approval by the

Foreign Investment

Promotion Board (FIPB), RBI, SEBI,

FEMA, the required Line Ministry, etc.

Bureaucracy

• Foreign companies are

subject to tariffs, taxes which

egates the effect of low

production costs.• Domestic producers get

unfair comparative and

pricing advantage

through subsidies.

Changes in Indian Bureaucracy • The new BJP-led government has also, proposed measures to

reduce the regulation and bureaucracy in industry.• The new Government of Tamil Nadu, for instance, has

established a Single Window System to accord all such pre-project clearances at the State Government level.

• The Guidance Bureau will work on providing quick clearances thus, making it easier for Swedish companies to conduct/expand business activities in India.

• This will result in immediate improvement in the speed at which clearances/licenses are granted.

Taxation

• Since foreign investment generally comes in the form of a two-tier structure it attracts a double burden of taxes.

• Portfolio investors from abroad will now have to pay 15% tax on derivative transactions as income from derivatives is now classified as capital gains.

• This will have a negative impact on Swedish companies hoping to invest in India.

Changes in Taxation• In the recent budget announcement, the government said not

resort to retrospective taxation in the future and this law would not be reversed.

• He also aims to create a uniform taxation regime. This will have a positive impact on Swedish companies – reducing the risk of them being subject to a complicated tax procedures and retrospectively imposed taxes.

• The new government is in the process of implementing the GST (goods and services) tax in the coming months. This will result in the removal of various indirect taxes like luxury tax, state surcharges etc. It will reduce the tax burden on Swedish companies and will potentially lead to an efficient tax regime.

Infrastructure

• These infrastructure deficiencies add to the cost of Swedish Companies doing business in India.

• The 12th Five Year Plan of the government has targeted the following through Public Private Partnerships (PPP):

• $1 trillion on infrastructure. • Additional 180 airports• 6000 miles of new Highways • $60 billion investment in Ports

• In fact the Indian Government is also focusing on increasing the private sector investment to 50% that would give an opportunity to Swedish Companies to participate.

• The new government has also announced a number of initiatives and policies such as a focus on access to financing, efficient land acquisition and environmental clearances, progressive tax reliefs to incentivize developers and equipment suppliers in order to boost infrastructure development in India.

• BJP Government is focused on the Country’s investment in infrastructure to increase to 10% of its GDP by 2017 to achieve and sustain 8 to 9% GDP growth over a 5-year period.

• If this happens the ease and quality of doing business in India will improve significantly for Swedish companies.

Labor ForceIndia, with the second largest (after China) and one of the youngest labor forces in the world, has an abundance of labor ready to be employed in a variety of blue and white-collar jobs by Swedish companies. • In 2011, the Indian workers directly and indirectly employed by Swedish

companies stood at half a million (5 times more than 2006).• Low labor costs are a benefit of doing business in India and an

appreciating rupee vs. the dollar further reduces labor costs relative to other countries.

• India has a complicated minimum wage structure – varying from state to state and by occupation.

• Swedish companies in India pointed to the access to high quality white-collar labor and English-speaking workers as benefits of business in India.

• The BJP in its manifesto discussed vocational programs (National Multi-Skill Mission) and development of women’s entrepreneurial clusters. If implemented properly, these steps should give Swedish companies in India benefits in the long term.

Low Cost Production• India is considered a LCC or a low cost country for production.

The costs of entering the Indian market are extremely high thus Swedish companies in India don’t recognize the comparative cost advantage of doing business in India initially.

• In the long-term however, companies see the comparative cost advantage in India as an attractive reason to set up business in the country.

• Low labor costs and easy access to raw materials bring the cost of production down. However, Swedish companies have not realized the cost advantage in India to its full extent.

• As previously mentioned, firms are forced to spend large sums on paying tariffs, obtaining licenses etc. and thus the advantage of low cost production is often negated.

Special Economic Zones (SEZs)

Special Economic

Zones

Used to encourage

investment, generate

employment and promote

economic activity

Operational SEZs has

increased from 19 to 153

including a new defense SEZ in

Gujarat

Benefits include subsidized electricity, minimum

regulation, & tariff removal

etc.

Plans to accelerate

development of IT SEZs and restore tax exemptions

(DDT, MAT etc.)

Financing and Banking• A big advantage that Swedish companies highlighted about

business in India was the access to financing.• India has an extensive financing system for large Swedish firms

including both traditional and alternative channels of funding. • Sources of financing include domestic debt capital markets

(bonds, debentures etc.), equity capital market (domestic listings, private equity players), external commercial borrowings and both short and long term rupee funding from domestic and foreign banks.

Changes in Financing• The RBI recently gave out two new banking licenses for the

first time since 2004 and there is hope that there will be a further expansion of India’s banking system in the years to come.

• RBI governor, Raghuram Rajan, is also expected to announce policy measure that allow firms to obtain banking licenses ‘on tap’ if they meet certain regulations.

• For the last few years till 2013, foreign banks were only allowed to set up branches in India. However, the RBI also announced in late 2013 that foreign banks would escape many regulatory measures if they operate as ‘wholly owned subsidiaries.’

Land Availability & Office Space• This area being less of a challenge for Swedish companies can be

attributed to the changes in FDI policies along with measures that make it easier for foreign companies to set up office branches, production units etc.

• According to FEMA (Foreign Exchange Management) Rules (2000), foreign companies can buy land to set up branches or other places of business to carry out a permitted activity and not for anything else.

• Amendments to the Land Acquisition Act in 2013 made it much easier for the government to acquire land all over the country.

• The government will now look to acquire non-cultivable land to hand it out for industrial and research projects.

• These proposed measures along with the continued development of infrastructure will lead to an easier process for Swedish companies when attempting to buy land and new office space in India.

Investment/Expansion Plans • Despite the decreasing perception of the business climate

Swedish companies have a long term operating plans• Less than 10% of the Swedish companies experienced a loss of

revenue, resources during the years of Indian economic slowdown (2010-2012)

• In 2013 over 30% companies were looking to increase their investments by >21%.

Conclusion• On the whole Swedish companies enjoy doing business in India for

a number of reasons. • They hold competitive advantages in terms of product quality,

design, management and brand name. The companies experience an increasing demand for their products and despite the increasing costs of production. Swedish companies in India continue to generate large profits.

• There are a number of factors that point to longer-term commitment of Swedish companies. These include the increasing employment of local workers; only 4% of the companies as of 2013 were planning to decrease future activities and an increasing number of companies with multiple offices across the country. Companies have come with the message of ‘Think global, act local’ by putting an emphasis on hiring Indian workers and adapting their business models.

Conclusion (cont.)• As India undergoes a huge change in its government and foreign policies,

Swedish Companies are likely to increase business activity in the Indian Market. With a pro-industry regime, many benefits are being provided to foreign investors such as single window clearances, increased FDI in defense, e-commerce and insurance, no retrospective taxation and easier taxation policies.

• A better-developed and more skilled workforce will improve the quality of doing business activity in India.

• The government is now prioritizing infrastructure development, which is a major challenge currently to business in India. This is being done through PPP which is an advantage for Swedish companies.

• Despite the general trend of decreasing perception of business climate in India as reflected by Swedish companies in the Business Climate Surveys of 2008-2013, it has been concluded that this is likely to change in the new future.

• After years of policy paralysis and economic slowdown affecting the Indian economy, the coming of the new government and emphasis on investor friendly policies will potentially result in the significant improvement of the ease of doing business in India in the coming years.