Introduction
RXP Services is a technology consulting company that provides professional services to various corporations and government bodies across Australia. People working in RXP services are highly competent, each specializing in at least one technology area such as business intelligence, information management, integration, integration forms, software services etc. RXP Services has been highly successful in its respective industry, consequently declaring a record net profit of AUD $ 10.62 million after tax to its shareholders for the financial year ended 30th June, 2016. (RXP Services, 2016)
This report has been prepared for the CEO of RXP Services, Mr. Ross Fielding in order to analyse the prospect of commencing business operations in India. The report aims to evaluate the various elements of the business environment of India, identify opportunity & risk variables and finally, recommend measures to be undertaken for starting business in India. The structure of the report provides a background on the social, political, legal, economic, trade & financial environments of India as well as the infrastructure. It is then followed by an overall assessment of India as a business prospect and a list of recommendations for RXP Services.
Social Environment
India has a culturally diverse demographic population reflecting different ethnic origins, religions and history. India’s main population is comprised of Hindus, accounting for 79.8 % of the population (Central Intelligence Agency, 2015). Other communities include Muslims, Christians and Sikhs. India has a very rich culture, religious beliefs and traditions which still prove to be key factors for foreign investors.
India is expected to become the most populous nation in the world by 2025 with an estimated population of about 1.4 billion as the population is growing by 1.2 % per annum. The country’s population that is eligible to work will increase from 761 million to 869 million, making India the youngest country by 2020 with an average age of 29 years (EY, 2013). India will also account for 28 % of the world’s workforce. Even currently, 40.8 % of India’s population lies in the age group of 25-54 years. China’s workforce will start tapering off by 2015, while India’s grows till 2020. This demographic dividend will certainly benefit India as this increasing workforce provides the nation with a window of opportunity to improve labour productivity, enhance revenue from services, increase domestic production and reduce burden on the older residents. New Delhi, Mumbai, Kolkata, Bangalore, Chennai & Hyderabad continue to be the most populous cities in India with an urbanization rate of 2.38 % per annum (Central Intelligence Agency, 2015). The growing young population and fast urbanization is an indicator of a readily available workforce, higher demand for projects and adequacy of labour supply for current & future purposes for RXP Services.
India also has many socially undesirable problems such as a large income disparity, caste system, sanitation problems and widespread poverty. 400 million people still live in poverty and as a result, the government announced the Housing For All Scheme in June 2015 which aims to provide a home for all Indian families by 2022 by promoting affordable housing for the poorer sections of society through credit-linked subsidy and provide affordable housing by private and public stakeholder collaborations thereby increasing social welfare. (KPMG, 2016)
Political & Legal Environment
India is the largest democracy in the world with an estimated population of 1.252 billion people (Central Intelligence Agency, 2016). This indicates that the country is run by the principle of ‘people power’. Presidential elections are held every five years. On 26th May 2014, Narendra Modi was elected as the Prime Minister of India. Since then, the country has undergone a massive change and progressed on the political front. Corruption has reduced massively as India jumped 9 places to rank 76 out of 168 as compared to last year’s rank 85 in the World Corruption Index (Transparecy International, 2016). India also overtook China as the largest FDI destination in the world after attracting USD 63 billion in the year 2015 (The Economic Times Of India, 2016). The country is governed by Common Law according to the Constitution Of India (Bar Council Of India, 2016) and has strong individual and property rights which prove to be ideal catalysts for doing business.
Due to all the aforementioned factors, India has emerged as a global economy. With this said, India has a long way to go as it still suffers from large scale corruption, excessive red tape for legal matters & procedural delays suggesting that Systemic Political Risk for RXP Services is probable. What are considered to be normal business practices in India are still considered unethical in most Western countries. India is also not the easiest place to do business in as it ranks at 130 out of 189 in The Ease Of Doing Business Index (World Bank, 2016). These rankings suggest that business in India comes with high risk.
After assessing the pros and cons of the political and legal environment, the prospect of starting business in India for RXP Services still seems bright. The government still has 3 years of tenure left and India’s situation is only improving globally. Although the risk factor is high, so would be the profits if risk premium is calculated in advance and measures are undertaken carefully to avoid red tape and corruption as much as possible. Another positive sign for RXP Services is that since 2005, FDI in India has increased more than two times (World Bank, 2015), indicating the increasing vote of confidence among foreign investors to work in India and increasing openness of the economy towards FDI.
Economic Environment
India is currently the world’s seventh biggest economy as well as the fastest growing major economy in the world with a growth rate of 7.6% in 2015-16 (World Bank, 2015). India has a large domestic consumption base of 59.7% with increasing levels of purchasing power and GDP per capita. According to (World Bank, 2015), India’s GDP per capita has risen more than two times from $2860 in 2005 to $6089 in 2015. This indicates the growing levels of disposable income among the people of India, especially the middle class.
Foreign companies in India are subject to a 40% Corporate Income Tax rate along with surcharge and education cess, which results in a rate of either 41.20%, 42.02% or 43.26% depending upon the level of income of the company (KPMG, 2015). For all the FDI that India proposes and considering that services account for 54.4% of the economy, the tax rates are still high for foreign firms. In addition to high tax rates, organization of new investment and production still remains a problem. Incorporation and launching of a business takes more than 25 days on average, with licensing requirements proving to be costly. Labour markets are underdeveloped and lack efficiency. India ranks at 123 out of 178 in the Index Of Economic Freedom under the category of ‘mostly unfree’ (The Heritage Foundation, 2016).
Trade & Financial Environment
Australia and India have a strong trade relationship. India is Australia’s tenth-largest trading partner and Australia’s fifth largest export market. Two-way trade of goods and services between both countries totalled for $18 billion in 2014-15 (Australian High Commission, 2016). India and Australia signed an agreement in 1991 for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income. Although this agreement has boosted financial trade between the two countries, the potential is still very much unfulfilled due to high tariffs and taxation rates in both countries.
Recognising the need to boost bilateral trade and investment, both governments decided to re-negotiate a fresh Joint Free Trade Agreement (FTA) or The Comprehensive Economic Cooperation Agreement (CECA) in 2011. According to (The Economic Times Of India, 2016), the FTA is to be finalised in another month or so as a result of which bilateral trade and investment is expected to rise exponentially due to liberalisation of tax rates and duties. This FTA could be the key to investment for RXP Services in India as this would directly increase profits and minimize expenses that would earlier be required to be paid in the form of taxes. India is the world's largest outsourcing destination for the information technology (IT) industry, accounting for approximately 67% of the billion dollar US market (Indian Brand Equity Foundation, 2016). Furthermore, the IT industry has led the economic transformation of the country and created the perception of India as a major player in the global economy. India's cost competitiveness in providing IT services, which is approximately 3-4 times cheaper than the US, continues to be the mainstay of its Unique Selling Proposition (USP) in the global outsourcing market. This too, is in favor of RXP Services as outsourcing projects locally would prove to be an economical as well a convenient strategy. The currency exchange rate would also prove to be a decisive factor for low cost projects as 1 Australian Dollar = 50 Indian Rupees (approx.) along with no major fluctuations.
Lastly, India has a very high level of external debt of USD $485.6 billion as of March 2016, an increase of 2.2% from last year. Moreover, $402.2 billion of this debt is long term, indicating the large financial liability faced by the country (Reserve Bank Of India, 2016). Although not certain, partial repayment of this liability could be in the form of higher indirect taxes imposed on citizens and foreign companies.
Overall Assessment
After undergoing a massive economic transformation over the past decade, India proves to be an attractive option for business. A short run and long run analysis of the country gives RXP Services the following opportunities to capitalize on –
Firstly, the FTA between India and Australia is expected to be finalized soon which would lower tariffs & tax rates on import and export of goods & services as well as increase the size of bilateral investment and trade.
Secondly, a strong economic growth of 7.5% is projected by (OECD, 2016) due to a large expected increase in public wages supported by declining inflation. In addition to this, the 12th five year plan of India aims to attract further FDI, increase industrial decentralization, enhance capacity growth & better manage urbanization. These factors prove to be ideal catalysts for investment by foreign firms.
Lastly, forecasts predict that India will have the youngest workforce of the world in the coming 10 years and will also account for 28% of the entire world’s workforce. This paradigm shift would create enough labor supply to meet global demand. Identification and utilization of this demographic dividend could well prove to be a decisive factor for RXP Service’s business operations in the short run as well as the long run.
With that said, India faces overwhelming problems in terms of infrastructure, health, sanitation, external debt, corruption & red tape but figures suggest that these problems are on the decline. The government has also launched various long term programs such as Housing For All, AMRUT, Make In India, UDAY, Digital India and many more to tackle and improve the current situation of the country by 2022 (KPMG, 2016). Finally, the current challenges India faces could be positively offset by the upward trends of increasing education, growing middle class, liberalization of trade laws and a rapidly growing GDP.