There has been a distinct change in perception about the Indian economy since Prime Minister, Narendra Modi, came into power in 2014, culminating in a wide-reaching return of business confidence and a spike in transport equipment sales.
Yet, there is more behind India’s recent resurgence than the usual dose of post-election euphoria, experts argue, with the improvement largely carried by infrastructure and manufacturing instead of the much talked-about IT and telecommunication industry. The result could be a historic change of direction for the subcontinent that would see it morph from a technology services into a manufacturing hub.
Stage one of the transformation has already begun: Since Modi secured the nation’s first single-party majority in almost three decades last May, he introduced a comprehensive structural and financial reform agenda that prompted both the World Bank and the International Monetary Fund to upgrade India’s growth forecast again, calling it the fastest expanding globally, ahead of long-time favourite China.
“India, today, is in a far better situation than it was a year ago,” A. Didar Singh, Secretary General of the Federation of Indian Chambers of Commerce and Industry, recently summarised the development in an Indo-Asian News Service (IANS) interview. “The policy direction set by the Modi Government has definitely improved business sentiment. The Government has given a huge impetus to infrastructure activities and taken several steps to revive the growth of the economy.”
Even rating agency Moody’s, which had warned India of a downgrade not too long ago, changed the outlook for the country from stable to positive again – indicating just how impactful the change of political leadership has been for the subcontinent. “The establishment of an inflation targeting framework, the efforts to address banking sector weaknesses, the passage of various bills and a realistic budget are all positive for the sovereign credit profile,” Moody’s Senior Vice-President, Atsi Sheth, told IANS.
The result is a new feeling of optimism that is tangible both within and outside the country, even though there is still much work to be done for investors’ favourite Modi to achieve his goal of boosting industrial growth. “Ultimately, it is the implementation of infrastructure, regulatory and governance improvements that will determine whether [Modi’s reform course] is successful or not,” IANS quoted Sheth, who is acutely aware that a change in economic demand or geopolitical stability could negate the country’s change effort overnight.
At a meeting of Southeast Asian heads of state in Malaysia last month, Modi responded by saying his Cabinet was feverishly working on a new system to ensure a more transparent and predictable tax regime, protect intellectual property rights and remove bottlenecks that may obstruct the ease of doing business in India. Pointing out his reform agenda was “just a way station” on the long journey to transform the trillion economy, he said, “We must reform to transform. ASEAN economies have done their bit for Asia’s resurgence. Now, it is India’s turn. And we know that our time has come. We are at a take-off stage.”
One project that may help Modi set the tone for the all-important second reform stage is the creation of a 3,300km West-East link, which would not only help kick-start the infrastructure and construction industry, but also enable a more efficient road transport network capable of handling articulated vehicles – an outcome that would eventually translate into semi-trailer sales going up too. At the moment, many roads are still too rough to allow for articulated units to be used risk-free, or simply too small.
A second key area that will need attention for India’s transformation to be successful is industrial manufacturing itself. While many still associate the country with IT services, Modi’s focus is on manufacturing as the new employment engine – and according to Harvard Business Review expert, Vijay Govindarajan, the PM has a point. “India is the third-largest economy in purchasing power parity after the US and China, it has a large population of engineers and factory workers, its intellectual property is widely respected, and it is easy to find English-speaking managers there,” he summarises the status quo.
As a result, Govindarajan says more and more international businesses are now looking to set up shop in India and benefit from Modi’s business-friendly political agenda, which has notably boosted purchasing power and local demand during his first year in office. US company Cummins, for example, has already made the leap and is now manufacturing engines, generators and turbochargers in India.
What’s interesting about the Cummins example, Govindarajan explains, is that India is not only important as a target market for the US brand, but as a regional manufacturing and export hub: “Cummins India exports grew at 14 per cent annually over the last five years and now constitute 40 per cent of sales,” he says. “The company has 20 manufacturing plants in India, and one-sixth of Cummins’ 54,000 worldwide employees currently work there.”
While Govindarajan says Cummins is a “prime example” for a western company gaining a strong foothold in the Indian market, he is quick to acknowledge that the brand struggled navigating the difficult land acquisition process and complex regulatory landscape before calling the move a success – the reason being that India is still in a transformative state, with many a framework yet to be established.
As a result, he says businesses wanting to benefit from Modi’s commitment to bolster local manufacturing should consider co-operating with a local entity instead of starting a new operation from scratch. “While advising American corporate clients, [we] found that Indian suppliers can be globally competitive in manufacturing items such as automotive components, which shows how India’s manufacturing sector is advancing [beyond the IT sector],” he explains.
To be part of India’s new manufacturing boom, many an international OEM has already been spotted scouting the country’s highly unorganised trailer market for a potential associate – hoping a local JV could help them challenge top-selling like OEMs Dutch Lanka Trailers (DLT), Tranztar and PL Haulwel.
Indian manufacturing businesses, meanwhile, are equally open to the idea of joining forces with multi-national brands from Germany or the US – not only because they hope to leverage their proven technical knowledge, but also their wealth of experience in change management. Based on the assumption that India’s current situation is similar to 1970s Europe, they want to be prepared for the consolidation wave that is likely to follow the establishment of more stringent technical and regulatory standards across the country.
Throughout the transport and logistics community, a similar development is already visible today: Following the European example, where owner-drivers have slowly been displaced by large corporations that thrive on the creation of economies of scale, Indian transport businesses are now exploring new growth opportunities outside the traditional one man, one truck concept.
Experts say that process is largely driven by the advent of multi-national retailers like Wal-Mart, Tesco and IKEA, which want to replicate existing logistics models in India instead of having to reinvent the wheel – ideally with the support of trusted suppliers that know how to play the game.
With that in mind, India is now hoping to inspire a new generation of European and US businesses to invest again, with the first wave – mainly driven by truck makers like Volvo and Mercedes-Benz – now almost a decade in the past.
Axle and suspension specialist BPW, for example, is currently very proactive in India, hoping to ride the second wave of foreign investment and be part of the nation’s transformation into an even more powerful manufacturing location. In 2014, the company therefore moved from purely importing running gear to a local assembly model, with local companies like Satrac in Bangalore, Dutch Lanka Trailers in Pune and Arunachala Logistics in Hyderabad on board to trial the locally made gear on the road.
“We have built some very fruitful relationships with local companies to create win-win situations here in India,” says Philipp Bäcker, Director of BPW Trailer Systems India, which has been active on the subcontinent since 2010. “For us as a German company, it’s important that we are not only coming here as a seller, but as a learner who is willing to collaborate.”
In line with Prime Minister Modi’s future vision, Bäcker says developing and assembling equipment locally in Pune will make the German brand more flexible and price competitive – two attributes he deems key to being successful in modern-day India. With locally sourced components, he says the 2016 BPW line-up is on track to be 100 per cent Indian made, effectively turning the German company into a viable local player.
Touching on the company’s growing telematics and technology offering, he adds that international players like BPW are in a strong position to help India morph into the manufacturing hotspot Modi has envisioned. “BPW has access to a host of technologies to reduce food wastage, road accidents and vehicle damage, so there is definitely a lot we can learn from each other,” he says. “With infrastructure investment on the rise and more reforms on the go, maybe even including the launch of a Goods and Services Tax (GST, ed.), the opportunities are infinite – both for us as a private entity and India as whole.”
Regardless of Bäcker’s optimism, global rating firm S&P recently expressed concerns over the slowdown in the pace of reforms in the country, urging PM Modi and his Cabinet to pursue its reform agenda and not overshoot the fiscal deficit target.
Still, Bäcker’s future vision is not unfounded, says Harvard Business Review expert, Vijay Govindarajan. He explains the tone of the debate has changed notably in India, with many citing the proverbial ‘glass half full’ mentality to describe India’s new economic narrative. “From India’s perspective, manufacturing is probably the only way to lift half a billion more of its population out of poverty. If Prime Minister Modi is able to inspire those around him to unlock India’s land and labour for manufacturing, domestic and global corporations will accelerate this transformation,” he says, also pointing at the positive effect such a development would have on the weather-beaten transport equipment community.
“We don’t expect Indian manufacturing to go head to head with factories in China, Japan, the United States, or Germany any time soon. But top executives who wish to diversify their supply chains should no longer only consider India as a supplier of software and call centre services. Manufacturing is the next frontier in India.”