Prepare for the New Kid on the Block: India - Global Trade Magazine
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  August 10th, 2015 | Written by

Prepare for the New Kid on the Block: India

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  • Transporting freight across state borders in India is often just as complex as crossing international borders.
  • When India’s Goods and Services Tax takes effect goods will be subject to a single national tax and will move freely.
  • India’s government is making strides to facilitate both private and public investment in infrastructure.

China? There lies a sleeping giant. Let him sleep! For when he wakes he will move the world.”

Whether Napoleon Bonaparte ever actually uttered those words is debatable, but few would argue that China did awaken, and in fact, moved not only the world, but the global economy. In just 20 years, China has skyrocketed from the eighth largest economy in the world to second, resulting in a burgeoning consumer market.

But what about China’s neighbor, India? With its similarly sized population and rising middle class, India is making moves designed to fling its trade doors wide open.

India’s markets have long been artificially handicapped by complex tax laws that vary between and across its states and municipalities. Transporting freight across state borders in India is often just as complex, or more so, than crossing international borders. This adds a staggering 30 percent to the costs of goods sold in the country and leads to tremendous inefficiency. Some companies construct distribution centers a few miles from each other in neighboring states to keep from moving freight between states.

This is all set to change when India’s Goods and Services Tax (GST) takes effect, scheduled for April 2016. After that, goods will be subject to a single national tax and freely move across the country without impedance or additional expense.

Companies already conducting business in India will reap huge savings in reduction in paperwork, manpower, and litigation costs. According to industry expert Loknath Rao, they’ll also be able to plan expansions across the country without having to worry about how to create product pricing to account for differential sales tax rates and estimated varying demand potential. They’ll finally be able to optimize their supply chains.

More importantly, multinational companies that did not previously have the resources to operate profitably within the country’s complex tax structure will be able to enter the country for the first time.

Another major issue that has hampered consumer markets in India is the lack of proper infrastructure. India has grown to rely on its roads to move 65 percent of its freight. But India’s fleets are generally smaller, privately owned, and traverse unbelievably congested roads. India hasn’t yet realized—or invested in—the immense potential of its waterways or extensive rail network. Under Prime Minister Narendra Modi’s guidance, this highly fragmented logistics sector is scheduled for a complete transformation.

While its manufacturing industry mostly flocks to a few scattered states—like Gujarat, Tamil Nadu, and Maharashtra because of the superior infrastructure and manpower, India’s government is now largely following China’s infrastructure development model. It is making strides to facilitate an infrastructure and tax structure that enables both private and public investment. It has already made it easier for private companies to develop airports by reducing capital requirements, allowed non-Indian entities to own the power plants they build, and fund up to 40 percent of public-private highway development.

The government will also invest $133 billion into Indian Railways over the next five years, including $13 billion for dedicated intermodal freight corridor projects that will connect inland cities to ports.

Many international investors believe in Modi’s ability to implement both political and infrastructure changes that will prod this newly awakened giant. As India’s domestic consumer markets grow, they will also become easier to serve and accelerate each other’s expansion. For companies that serve consumers or support those that do, the time is now to prepare for success in the thriving near-future markets of India.

 

Tim Foster is managing director of Asia-Pacific for Chainalytics. He has over 20 years of supply chain experience across the region both as a consultant and as an executive with leading multinational manufacturers.


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