India: New Economy Old Economy, the latest report by the Economic Analytical Unit, Department of Foreign Affairs and Trade

Media release from the Australian Department of Foreign Affairs and Trade

The Minister for Foreign Affairs, Alexander Downer, will make a major policy
statement on Australia's relations with India when he launches the latest
report by the Economic Analytical Unit, Department of Foreign Affairs and
Trade, India: New Economy Old Economy, in Melbourne on 3 December
2001.

The report highlights how, after a decade of reforms, India's
large and diverse economy has become one of the fastest growing
emerging markets in the world. India is now Australia's twelfth
largest export market, up from between twentieth and twenty fifth a
decade ago and Australia's foreign direct investment in India also
has risen significantly. While India's medium to long term growth
depends largely on the speed and extent of ongoing reforms, its
current growth outlook overshadows that of most other Asian markets,
which face slow growth or contraction in the next year or so.

The report highlights developments in several fast growing
sectors and states which provide increasing opportunities for
Australian traders and investors. In particular, several 'new
economy' service sectors like information technology, IT,
telecommunications and finance are growing rapidly, though
opportunities also are emerging in 'old economy' sectors like
mining and advanced technology manufacturing. Also, a group of four
more outward oriented states in the south and west of the country,
Gujarat, Karnataka, Maharashtra and Tamil Nadu, where new service
industries are concentrated, are performing more strongly than the
rest of India and attracting the bulk of new investment.

The report details case studies of over 30 companies from around
Australia which are trading and investing successfully in many
Indian sectors and states.

Media representatives are invited to attend, as guests of the
EAU, this major India policy statement in Melbourne at a breakfast
launch at the Park Hyatt Hotel on 3 December. The report also will
be launched in Sydney, Perth, Canberra and Brisbane on 4, 5, 6 and
11 December.

For briefings, and free electronic or express delivered
embargoed copies of the report contact:

NOTES FOR THE MEDIA

India: New Economy Old Economy

INDIA'S GROWTH AND Reform Outlook

• India has grown robustly since its early 1990s reforms and in
  early 2001, the Government announced further fiscal, labour
  market, trade, foreign investment, privatisation and government
  administration reforms; if implemented, these could return India
  to previous real GDP growth peaks of 7 to 8 per cent per year.
• However, since the mid 1990s, governments of India's large
  decentralised democracy have found it difficult to achieve
  consensus for further rapid reform.
• A more likely scenario is continuing incremental reform;
  together with past reforms and on going trade liberalisation
  commitments, this should ensure India maintains 5 to 6 per cent
  growth over the medium term.
• However, at a time when much of Asia outside China faces slow
  growth or contraction, India's growth prospects look
  relatively robust.
• Due to reforms, India's 'middle class' is expanding
  rapidly; about 60 million people now live in households with
  income over A$6 000 per year, compared to only about 25 million
  in 1994-95.

AUSTRALIA-INDIA BUSINESS

• Since the early 1990s, Australian exports to India have grown
  50 per cent more rapidly than our total exports. Bulk resource
  and agricultural commodities dominate Australia's exports to
  India
• The report includes case studies of successful commodity
  exporters including BHP Billiton, MIM, AWB Limited (formerly the
  Australian Wheat Board), Colly Cotton and Scanlan Wools.
• Service exports like education and tourism also are growing
  strongly, while IT, environmental, health and media services
  show promise. Competitively priced higher technology
  manufactures also are finding markets.
• Case studies in the report include Monash University, RMIT
  University, Central College (which all enrol large numbers of
  Indian students) Australian Tourist Commission, Runge Mining
  (mining software) Australian Hospital Design Group (hospital
  design, planning and training), Cutting Edge Post (film editing
  services), Greenspan Technology (environmental instruments) and
  the International Centre for Application of Solar Energy
  (alternative energy technologies).
• Australia's direct investment stock in India increased
  strongly during the 1990s, though at about A$1billion it is
  still under 1 per cent of Australia's total foreign direct
  investment, FDI, stock. Fast growing service sectors, including
  IT, media and finance, mining and niche manufacturing are the
  main areas attracting recent Australian investor interest. (See
  case studies under new and old economy sections, below).

INDIA'S BUSINESS ENVIRONMENT

• Despite growing trade and investment, foreign companies in
  India consider it a challenging business environment. Major
  problems include infrastructure shortages and expense; red tape
  and transparency issues, intellectual property protection and
  the backlog in the court system.
• Three key messages emerging from the Australian firm case
  studies are:
  • the crucial nature of business partner choices
  • the need for patience and perseverance in dealing with the
    bureaucracy
  • the good potential for sales growth and profits if
    businesses succeed on these first two issues and have a well
    priced or unique product or service.

TRADE REFORMS

• Since the early 1990s, trade reform has been India's most
  substantial and successful area of economic reform; trade now
  represents about 30 per cent of India's GDP, up from only 15
  per cent before reforms. Despite on going trade reforms, India
  still imposes many restrictions and its average tariffs remain
  high by regional standards. Nevertheless, Australian exporters
  are finding new opportunities as import barriers fall in
  previously protected markets.
• Interesting case studies of Australian firms which have
  recently penetrated new Indian markets include Australia-India
  Fresh Food Alliance and Berri Ltd.

FOREIGN INVESTMENT REFORMS

• India's gradual economic liberalisation, growing incomes,
  generally low labour costs and the widespread use of English are
  some major attractors for foreign investors. Key sectors of
  manufacturing, mining, infrastructure and software now permit
  100 per cent FDI, though many sectors still impose foreign
  ownership limits below 100 per cent.
• However, with new FDI under US$2.5 billion in 2000, India
  still receives low per capita FDI inflows by emerging economy
  standards. The challenging business environment and remaining
  policy restrictions constrain sustained inflows into agriculture
  and, to a lesser extent, infrastructure, manufacturing and
  mining.
• Increasingly, fast growing 'new economy' services sectors,
  particularly the export oriented information technology, IT,
  sector and several high performing states, are attracting the
  majority of foreign investment approvals.

'NEW ECONOMY' INVESTMENT OPPORTUNITIES

• IN addition to IT, finance, telecommunications, health, education,
  environmental services, biotechnology, media and entertainment also
  can offer attractive direct investment opportunities. The report found
  that since the 1990s reforms, only the service sector has grown more
  considerably strongly than in the 1980s; manufacturing growth has improved
  only marginally, while infrastructure and mining have grown more slowly.
• With total revenue expected to reach about US$11.4 billion in 2000-01,
  India's IT sector is flourishing; this is due the country's huge pool
  of skilled, relatively low cost IT engineers and strongly supportive
  government policy. The software sector is the fastest growing major
  component of the IT industry; its US dollar measured revenue expanded
  46 per cent per year for the past 7 years to reach US$7.4 billion in
  2000-01. It now employs about 340 000 people and exported about 70 per
  cent of its output last year. Although India trains between 35 000
  and 50 000 new software engineers each year, with the sector's rapid
  growth, demand is outstripping supply and skilled staff shortages have
  pushed up IT engineer salaries by around 20 per cent per year since
  the late 1990s. This situation will prove a challenge to the longer-term
  viability of the sector in India, although the Indian government is
  responding encouragingly to this challenge.
• Another 70 000 Indian workers now are employed in the even faster
  growing IT enabled sector (call centres, back office support, data entry,
  etc); its revenue more than tripled over the last two years. This sector
  should face less labour shortages, as it has a much larger pool of potential
  employees to draw from, so may have even stronger growth prospects than
  software.
• Case studies of Australian firms successfully developing software
  in India include ANZ IT and Lumley Technology; representatives of these
  firms will speak at the Melbourne and Sydney launches (respectively).
• The financial sector increasingly is open to foreign investment and
  is growing strongly. While banking has been constrained by a strong
  public presence, overstaffing and non-performing assets, the Government
  is working to address these issues. Investors may find the best opportunities
  lie in partnering recent private Indian financial sector entrants.
• The report includes a case study of AMP's recent infrastructure fund
  and insurance joint ventures. AMP's new Indian insurance venture partner
  and an AMP representative will speak at the Sydney launch.
• The telecommunications sector also is growing strongly; recent reforms
  promise opportunities for private companies to compete more effectively
  with public incumbents and provide services and equipment to this sector;
  foreign investor interest in this sector is increasing again.
• Health, education, biotechnology, environmental services, media and
  entertainment are other fast growing 'new economy' sectors where recent
  liberalisation and stronger market growth should allow Australian firms
  with strong capabilities in these sectors to invest profitably.
• Several Australian educational institutions and other companies already
  are involved in these sectors. The report includes case studies of Baltec
  Systems, which has established an Indian office to provide environmental
  technologies to Indian firms; and the joint venture between Deakin University
  and the Association of Professional Engineers, Scientists and Managers
  Australia, to offer advanced degrees in IT in India.

'OLD ECONOMY' INVESTMENT OPPORTUNITIES

• Among the 'old economy' sectors of manufacturing, mining,
  infrastructure and agriculture, mining, advanced technology
  manufacturing and niche infrastructure currently are the most
  prospective.
• Recent mining reforms are encouraging. India's fiscal regime
  for mining now approaches international competitiveness, while
  oil and gas offer medium term potential. Recently, several
  progressive states issued more mineral prospecting leases,
  significantly increasing Australian miners' interest in India.
• Case studies of Australian miners investing in India include
  BHP Billiton and mining juniors Grenfell Resources (base metals)
  and Mineral Deposits Ltd (mineral sand mining).
• While manufacturing sectors increasingly are opening to
  foreign direct investment, some remaining ownership caps,
  infrastructure shortages and government regulation have kept
  foreign investment to modest levels. Nevertheless, several
  Australian firms are succeeding in the manufacturing sector,
  usually by bringing high technology processes, skills and
  products to India.
• Case studies of Australian manufactures operating successfully
  in India include Fosters Group (brewing), Ulco Medical (medical
  equipment), Clipsal (switches) and Cactus Imaging (high tech
  billboards)
• The Indian Government allows 100 per cent foreign investment
  in many infrastructure sectors, but private ports and aid funded
  road projects are the most prospective infrastructure sectors
  for investors and goods and service exporters. Slowly advancing
  regulatory reform and protracted negotiations inhibit foreign
  investment in other sectors.
• The report includes case studies of P&O Ports, based in
  Sydney, the largest foreign port developer in India and
  infrastructure consulting firm SMEC International, which
  operates one of the largest foreign construction consulting
  services businesses in India.

INDIA'S FAST GROWING STATES

• The report finds Australian businesses can benefit from
  focusing their export and investment efforts in the high
  performing states, whose higher incomes, faster growth and
  better business environments offer investors and traders more
  opportunities.
• Since the reforms started, four southern and western states,
  Gujarat, Karnataka, Maharashtra and Tamil Nadu, have achieved
  significantly stronger real GDP and per capita income growth
  than other major Indian states. While they have only 28 per cent
  of India's population, these states produce 40 per cent of its
  output and attract 55 per cent of its local and foreign
  investment.
• These four high performing states excel because India's
  economic reforms most benefit industry and services in which
  they specialise; these states also are more export oriented and
  in most cases have better infrastructure than other states. A
  strong historical focus on education and business and some state
  policy reforms also helps their performance.
• A second tier of states, Andhra Pradesh, Kerala, Rajasthan and
  West Bengal are performing better than the remaining states and
  could become high achievers over the next decade.

IMPLICATIONS FOR AUSTRALIAN BUSINESS

• India's reforms are creating interesting trade and
  investment opportunities for Australian firms in a rangeof fast
  growing 'new economy' sectors and high performing states; as
  well, higher incomes and trade liberalisation are boosting
  Australian commodity, niche manufactures and services exports to
  India.
• Further comprehensive reforms would consolidate growth and
  expand these opportunities. In the short term, Australian
  businesses operating in India can expect incremental reforms to
  continue; more comprehensive reform is unlikely given political
  constraints the central government faces. Major changes to the
  business environment also are unlikely in the short to medium
  term, though some states gradually are reducing red tape and
  increasing labour market flexibility. Infrastructure shortages
  are likely to remain acute for some time.
• As India's reforms deepen, its growth potential is huge.
  Already Australian businesses are accessing promising trade and
  investment opportunities and prospects for expanding commercial
  relations are strong.