Asia Inc Jan 94
BUSINESS: India's middle class boom
Upsurge In India
Some 300 million newly affluent consumers make this the most promising market
in Asia. So where are the East Asian Investors?
Beneath the early morning Indian sun, a fleet of six-ton delivery trucks
filled with large, round signs bearing a familiar red-and-white logo sets
out from a bottling plant in Hathras, a town in west-central Uttar Pradesh
state. Their mission: to reclaim territory for the Coca-Cola Co. after a
16-year absence by planting the company's colors throughout this land of
853 million people.
Coca-Cola and many other multinational companies left India after 1977, rejecting
the government's effort to enforce a law that required them to dilute their
equity in their Indian operations to 40 percent. But since the liberalization
of India's economy that began almost three years ago, Coca-Cola and others
are coming back for the real thing: a market of 300 million middle-class
While many investors in Asia are mesmerized by the vision of a billion-strong
market in China, few have paid much attention to India. But since July 1991,
when Prime Minister P.V. Narasimha Rao took measures to open up the economy,
India has become a hot market for foreign consumer goods.
Investment in India may even produce bigger rewards faster than in China.
"Both India and China have half a billion very poor people," explains Timothy
J. Malloy, Visa International's general manager for South and Southeast Asia.
"The crucial difference is that India has at least 100 million not-so-poor
people; China does not have that yet." Markets in both countries are expected
to grow 30 to 40 percent in the next few years. However, he notes, "India
has a head start: For 30 years it has created a professional middle class
without social upheaval. It is going to take China longer to reach there.
India has long been viewed as only a market for Oxfam and Mother Teresa.
On the surface, it may seem foolish to invest there: Per-capita income is
a paltry $ 310, the number of destitute could be as high as 300 million,
and the country is prone to violent social upheavals like the riots following
the demolition of the ancient Ayodhya mosque by Hindu zealots in December
But then there is that enticing 300-million number. Although estimates of
the size of the middle class vary, India's National Council of Applied Economic
Research (NCAER) found in a 1989 survey that 200 million Indians earn between
$ 700 and $ 1,400 annually, and another 100 million earn even more. At least
40 million Indians have annual incomes of more than $ 30,000, Visa International
estimates. They have the disposable income to afford $ 15 Van Heusen shirts
and $ 5,500 Indian-made Suzuki cars.
This burgeoning middle-class market rivals the population of the entire U.S.
or that of the European Community and is more than 10 times Australia's total
population. "It would be a very foolish marketing man who'd say 'who cares?'
when shown such numbers," says Alyque Padamsee, advertising agency Lintas's
regional coordinator for South Asia.
Moreover, per-capita income statistics fail to reflect the real purchasing
power of Indians. According to the now-fashionable purchasing-power-parity
(PPP) model, which some economists believe more accurately measures consumer
buying power, India is the fifth-largest economy in the world, with a PPP-adjusted
per-capita income of $ 1,255. States in western India, such as Gujarat and
Maharashtra, and in the north, such as the Punjab and Haryana, have incomes
comparable with newly industrialized nations like Malaysia and Indonesia.
Historically, India and East Asia have ignored each other when it comes to
doing business. India looked west for the technology and products it needed;
East Asia looked elsewhere for its markets because India discouraged imports
for so long, and because East Asian businesspeople had no guanxi (connections)
there anyway. But considering the success that newly arriving Western companies
are enjoying in India and the enormous purchasing power of the country's
middle class, it's time for East Asia to take a closer look.
Until a few years ago, modern India shunned private foreign investment and
products. After its independence from Britain in 1947, India tried to follow
the Gandhian principles of self-reliance and self-sufficiency under the leadership
of Jawaharlal Nehru, its first prime minister. It pursued this course through
democratic socialism. But the Indian economy became mired in a complex system
of protectionism, permits and licenses. Companies had to seek permission
for everything from opening and closing plants to expanding their operations,
or as the acerbic former managing director of Tata Iron and Steel Co., Russi
Mody, put it, even to go to the bathroom.
Still, the socialist approach worked -- for a while. By the 1960s, India
had an impressive industrial base. "Thou shalt not consume foreign products"
was an unwritten mantra that the bureaucratic babus (low-level clerks) parroted
as they made business decisions for Indian companies. But the push for self-sufficiency
became twisted into a paranoia of foreign things, which was exploited by
politicians, says John Patterson, an international business consultant who
lived in India for 11 years. In 1977, the ruling Janata Party, with its fervent
commitment to socialism and nationalization, began kicking out multinationals
with glee. Not surprisingly, foreign investment plunged.
The economy continued to function because of large domestic demand and barter
trade with the former Soviet Union: India bought guns and sold butter. Exports
were soon nonexistent, and imports were prohibitively expensive. So when
East Asia underwent its exceptional economic transformation in the 1970s
and 1980s, India was just a passive spectator.
It's easy to see why. Just look at the experience of PepsiCo. Inc. The U.S.-based
soft drink giant applied to set up a plant in 1983. But it had to wait five
years, face 200 critical questions in the parliament, 5,000 negative press
articles and 14 inter-ministerial committees before getting government approval.
It even agreed to unheard-of conditions, such as promising that half of its
sales would be from exports and only 25 percent of its revenues would come
from the sale of soft-drink concentrates.
While politicians were making life difficult for business, consumerism was
growing. It came to the fore in 1985 under Rajiv Gandhi, India's first designer
prime minister, who did not mind being seen wearing Cartier glasses and Gucci
shoes. Indian companies vied for consumers' attention and their crisp 100-rupee
notes, bombarding them with commercials in India's 15 official languages.
As a result, Indian consumer brands proliferated. The number of popular soaps,
for example, increased from 34 to 56, and the number of packaged teas jumped
from 31 to 80.
Still, official figures showed India mired in what economists derisively
referred to as the "Hindu growth rate," which was about 2 percent annually.
Meanwhile, a huge parallel economy was growing faster than the legitimate
one. Street-smart Indians stopped paying taxes when a 93.5 percent income
tax was slapped on the highest tax bracket in 1970. To avoid getting caught,
they had to spend their cash. Many bought gold. In 1992, India was the world's
largest buyer of gold. Anil Ambani, joint managing director of Reliance Industries
Ltd., India's largest private company, says estimates show Indians are hoarding
possibly as much as 8,000 tons.
Also fueling the spending boom were increases in salaries and wages. Since
1990, monthly salaries of people with master's of business administration
(M.B.A.) degrees from top Indian institutes have doubled in rupee terms to
more than $ 330. Wage increases pushed up organized labor's income levels
to the top 10 percent in the country. India's governments -- traditionally
the country's great job machine -- gave wage hikes far in excess of the consumer
The economy also got a boost from the "green revolution," an emerald wave
of agricultural prosperity that swept first across Punjab and Haryana, and
later to Uttar Pradesh and other parts of India. Thanks to government subsidies,
farmers grew relatively wealthy, and India became self-reliant in food. The
fruits of the green revolution started to be harvested in the 1980s when
tax-exempt farmers saw their incomes jump tremendously, creating a vast rural
market and an Indian development success story (see box, page 29).
Overseas Indians also contributed to economic growth. They began placing
large amounts of funds in India in the mid-1970s when banks there offered
them lucrative, double-digit interest rates as well as the right to take
their tax-free earnings out of the country. Indian manual laborers in the
Middle East also began remitting millions of dollars home to their families,
transforming the lives of people all over India, from big cities to rural
But the 300 million Indians who today gulp down Thums Up soft drinks, ride
in Maruti cars, watch programs on BPL-Sanyo videocassette recorders and wear
Flying Machines-brand jeans were impatient for change. This generation --
born after India's independence on midnight, August 15, 1947, and labeled
"midnight's children" by author Salman Rushdie -- form an assertive and pragmatic
generation that wants instant gratification. They do not relate to Mahatma
Gandhi's bold declaration when he launched the swadeshi (indigenous) movement
in the 1930s: "By taking off this foreign shirt I shed myself of foreign
rule." That foreign shirt has once again become a status symbol.
"The middle class is free from inhibitions which shackled the older bourgeoise,"
explains Gurcharan Das, Procter & Gamble's vice-president of worldwide
strategic planning who headed the company's Indian operations. "The new class
is non-ideological, pragmatic, result-oriented."
The status quo in India might have continued if not for the collapse of the
Soviet Union in 1991. India by then had a severe balance-of-payment crisis
with only enough reserves to pay for three weeks of imports, and it no longer
had a trading partner that would accept payment in rupees. Inflation was
running at 16 percent, and the country had a huge budget deficit.
Not until July 1991, under the leadership of reformist Prime Minister Rao,
did India begin to transform the red tape that ensnared businesses into a
red carpet. It relaxed restrictions on foreign ownership of companies, granting
automatic approval for 51 percent ownership in 36 sectors and allowing 100
percent ownership on a case-by-case basis (see box, right).
To further encourage foreign investment, the government reduced the capital
gains tax to 10 percent less than what domestic companies paid. And income
earned from investments in companies that exported their total output was
exempt from taxes. Those same companies were allowed to import machinery
and raw materials duty-free.
In addition, the government freed Indian companies to expand production without
checking with the babus in Delhi and allowed its protected businesses to
expand overseas. The rupee also was made fully convertible on trade accounts,
and Indians were allowed more latitude to use foreign exchange for business
The results of this new direction are already apparent. Foreign direct investment
in India in the 1980s averaged a puny $ 100 million a year. In 1992, it shot
up to $ 1.4 billion. "What's happening here is unparalleled," says Vimal
Bhandari, senior vice-president at Infrastructure Leasing & Financial
Services Ltd. (IL&FS), a Bombay-based finance company. "We are unshackling
the past with promise and hope despite the most serious religious controversy
since the 1947 partition." India's government doesn't have a single-party
majority, he notes. "Yet we are relentlessly reforming.".
As liberalization takes hold, India is beginning to reveal a new personality.
To understand the change, walk through Big KidsKemp, a huge children's clothing
store on Bangalore's busy Mahatma Gandhi Road. The loud pink interior, a
waterfall, flashing neon lights and a toy train giving free rides make you
feel as if you are in an amusement park. Clowns dressed as Laurel and Hardy
entertain the crowds while your children eat free cotton candy and ice cream.
Before buying those $ 15 jeans for your three-year-old, he can try them on
in a changing room that is designed to look like the front half of a car.
The father-and-son team of Vashi and Ravi Melwani -- cousins of Singapore's
leading retailers by the same name -- own the store, which is part of their
chain of children's clothing outlets. They set up the mega-store in 1990,
seeing it as an opportune time given the city's rising incomes, yuppie population
and cheap real estate. Big KidsKemp was an instant success. Annual sales
now are estimated to be close to $ 2 million.
The Melwanis could have had people like Rashmi and Vivek Gour and their baby
in mind when they planned their store. The suburban Bombay couple together
bring home some $ 500 a month after taxes, which places them in the top echelon
of India's middle class.
Rashmi works as a human resources consultant for international pharmaceutical
companies like Pfizer Ltd. and Hoechst Ltd. Vivek holds an M.B.A. from the
University of Delhi and works for finance company IL&FS. They just moved
from a company apartment in the western suburb of Andheri to one in the upmarket
Pali Hill area of suburban Khar, home to many of India's movie stars.
Their home is a picture of newly acquired, middle-class wealth. They drive
a Premier Padmini, a locally made car based on a Fiat model, and have filled
their home with Indian-made goods: a Sumeet washing machine, Godrej refrigerator
and BPL-Sanyo television and videocassette recorder. They listen to the latest
Indian pop music on a Philips cassette-player made in India. The Gours prefer
Indian goods. "Most of the Indian products are tailor-made to Indian conditions,
" says Vivek. But they choose foreign brands for some products such as cameras,
cosmetics and some of their clothes.
After working for eight years, the Gours have saved enough money to buy a
$ 21,000 apartment in New Delhi. (NCAER estimates Indians on average save
about 23 percent of their incomes.) "Life is good," Vivek says. "We do feel
a bit of a pinch because of the house we have bought in Delhi, and taxes
in India are killing (us)." Even so, they are able to maintain a standard
of living that a middle-class couple anywhere would find comfortable.
The rising affluence of Indians is apparent in many areas. According to the
Center for Monitoring the Indian Economy in Bombay, spending on household
appliances, consumer goods and services rose 14 percent annually through
the 1980s, while consumer electronics spending increased 30 percent per year.
Last year, some 3 million Indians traveled abroad. The tourism ministry estimates
62 million Indians travel within the country for pleasure annually. The number
of Indians investing in the country's 22 stock exchanges has soared from
2 million in 1980 to more than 20 million last year. And despite the great
number of tax evaders who don't want to leave a paper trail of their spending,
900,000 hold credit and charge cards; credit card companies expect this number
to increase 30 percent to 40 percent annually for the next five years.
Not everyone supports India's steps toward a more liberal economy. George
Fernandes, the opposition politician who as industries minister proudly chased
Coca-Cola and IBM Corp. out of India in 1977, swears he will launch a Gandhi-like
movement against multinationals that are re-entering the country. And followers
of a factional leader of farmers in Bangalore, M. Nanjudaswamy, have ransacked
the offices of Cargill Seeds ostensibly to protest a draft trade agreement
proposed under the General Agreement on Tariffs and Trades. Nanjudaswamy
claims it would force farmers to pay higher prices for seed.
Meanwhile, Indian companies are beginning to voice concerns that they will
be unable to survive the onslaught of foreign competition. A number of buyouts
and management takeovers by multinationals also makes them nervous.
Despite India's more liberal economic policies, the experience of Pepsi lingers
in the minds of some investors. But that hasn't daunted Pepsi, which is increasing
its investment in India by buying into an agricultural joint venture with
the Indian government. Other foreign companies, too, are enhancing their
presence by upping their equity stake in existing operations. New entrants,
primarily Westerners, have been quickly teaming up with Indian partners to
tap into the enormous middle-class market.
The biggest bull in the India bazaar so far is U.S.-based multinational General
Electric Co., which has tie-ups in medical electronics with Wipro Systems
Ltd., a Bangalore-based high-tech firm; in housing finance with Housing Development
Finance Corp.; and for refrigerators, washing machines and dryers with the
Godrej group. The plethora of Western products that are now or soon will
be available in India include Levi's jeans, McDonald's hamburgers, Arrow
shirts, Hush Puppies shoes, Ray-Ban sunglasses, Whirlpool appliances and
Not all foreign brands have succeeded. The Indian marketplace is littered
with famous names gasping for breath: English Leather cologne, Palmolive
soap, Tang powdered orange drink and even Pepsi, which despite its massive
advertising budgets could capture only a 20 percent market share in its first
three years, reporting losses of $ 17 million last year.
Despite the huge sales potential, East Asian companies remain noticeably
absent from India. Observing that Western firms have been burned in the past,
many Asian companies are questioning the sustainability of India's reforms.
They wonder whether the government might go on a mad drive of nationalization,
Given the size and power of India's new middle class and the thriving private
sector, such a reversal is unlikely. As midnight's children become midnight's
adults, they are realizing their potential to earn and seek gratification
for their desires. Armed with cash and credit cards, they stalk the markets
of Bangalore, Bombay and Delhi, and even smaller cities such as Hisar, Pune
and Cochin, improving their quality of life and creating a powerful constituency
for change that can only help India realize its dream of becoming a real
economic power. "People are realizing that letting in foreigners and self-sufficiency
are not two radically different ideas and that they can live with it and
progress," says business consultant Patterson.
As India sheds its socialist wrappings and further liberalizes its economy,
the rest of Asia may find it worthwhile to consider the Indian market. Observers
say even if the leading opposition party, the Bharatiya Janata Party (BJP),
were to come to power -- now a distant likelihood given its poor showing
in November's critical state elections -- economic liberalization would continue.
"There is no difference in the economic policies of the Congress and the
BJP; it is like Coke and Pepsi," says one leading Indian businessman.
By 1997, India will remove all quantitative restrictions on consumer goods
imports, vows Finance Minister Manmohan Singh. This is expected to further
increase consumer spending. "As tariffs come down, demand for all kinds of
goods in India is going to be enormous," says Uday Kotak, vice chairman of
Kotak Mahindra Finance, India's largest consumer finance company. "That's
why India must be seen as part of Asia. It will be its largest market."
Investing in India
Despite India's moves toward a more liberal economy, foreign investors still
must get government approval before setting up a business. However, such
approval -- from the Reserve Bank of India -- is virtually guaranteed for
investments in any of 36 "high-priority" sectors as long as foreign ownership
does not exceed 51 percent. Those high-priority businesses include pharmaceuticals,
computer software, soya products, food processing, hotels and tourism.
To own more than 51 percent of a company or to invest in businesses not included
on the high-priority list, investors must get the approval of the Foreign
Investment Promotion Board (FIPB) in New Delhi, which reports directly to
the prime minister.
For new Asian investors, joint ventures generally remain the best route.
The local partner's connections and knowledge of this huge and diverse market
are often key to marketing and distribution success.
Foreign investors also can acquire existing companies in India but only by
negotiating directly with the company. To prevent hostile takeovers, India
sets a 5 percent limit on the shares of one company that an individual foreign
entity can acquire through the stock market, with a limit of 24 percent of
a company's equity bought by all foreign investors through the stock market.
Overseas Indians (called nonresident Indians, or NRIs), overseas corporations
at least 60 percent owned by an NRI and foreign institutional investors can
trade directly on the stock exchange.
The Controller, Exchange Control Department
Reserve Bank of India, Shaheed Bhagat Singh Road
Bombay, India 400 023
Tel: (91) 22-286-1602, Fax: (91) 22-261-9330
The Secretary, Foreign Investment Promotion Board
Prime Minister's Office
South Block, New Delhi, India
Tel: (91) 11-301-7839, Fax: (91) 11-301-6857
Applications to the FIPB also can be made through Indian missions abroad.
Typically, the FIPB decides on a case within 45 days.