All Eyes on India

Watching the slowly changing political scene and being ready to act is key to doing global business in the country

One important, but sometimes not thoroughly considered, element of business is politics. And when it comes to global issues, it can be even more vital. India certainly has its share, especially Foreign Direct Investment (FDI) and the continuously proposed-and-stalled Goods & Services Tax (GST).

The most recent advance has been a government flip-flop on FDI, explained David Frentzel, VP Global Contract Logistics at APL Logistics. “There was a lot of uncertainty about FDI,” he said. “In December a year ago it was opened to retail brands, but a week later it was reversed and there was a lot of uncertainty. Now, multi-brand [i.e. Walmart, Ikea and Tesco] retailers can do 51 percent and people can invest in India. The government figured out that they can have an impact on what happens in the world.”

When the government originally set the 51 percent FDI for multi-brand retailers a year ago, it had to roll back the regulation almost immediately after protests by opposing parties, which said the move would destroy small retailers and local shops. In reinstating the issue, it was decided that the local shops would remain viable because of their personalized services that the huge stores can’t match. The government also says that multi-brand FDI, while bringing money into the country, also will provide consumers with the best possible pricing.

Some multi-national retailers like Wal-Mart, Carrefour (France) and Metro (Germany) have stores in India, but the previous rules did not allow them to sell to walk-in customers. They only could sell to smaller retailers around the country.

FDI in multi-brand won’t be easy. The minimum limit has been set at $100 million (U.S.) and half of the investment has to be in infrastructure, such as warehouses and cold-storage chains. And, at least 30 percent of the goods to be sold will have to be sourced from local producers, which could conceivably lead to quality control and supply issues.

The United Nations Conference on Trade and Developments World Investment Report 2012 expects foreign investments in India to increase by more than 20 percent by the end of 2013.

A taxing issue

India has a very complex taxing structure. Products are typically taxed twice, once by the central government (Central Sales Tax) and then by the respective state governments.

One long-debated solution is the Goods and Services Tax, which was originally presented in 2009 and scheduled to take effect in April 2010, then in January of 2011, then in April of this year. And now: Maybe 2013.

Proponents of GST say it will simplify the tax structure while increasing gross domestic product. In a recent presentation to the Indian business confederation, Bloomberg quoted Indian economist Vijay Kelkar on the inefficiency of a tax system that required “a truck traveling between Delhi and Chennai to cross five state borders and 10 checkposts.” In addition, a GST, Kelkar said, would eliminate “stamp duty, vehicle tax, taxes on goods and passengers, taxes and duties on electricity, entertainment tax, entry tax, luxury tax, taxes on lotteries, betting and gambling, purchase tax and all state surcharges and cesses [import or sales tax on a commodity].” All of those taxes would be subsumed into the Central GST, with both the states and central government receiving equal shares of revenue.

Opponents of the GST are concerned over control of the system and whether the Central government has the right to enter the state’s right to levy sales tax. They want to know who will decide the tax rates and exemptions, saying that also is a state right. Finally, they want the states to administer the program.

Estimates are that India will gain $15 billion a year by implementing the GST because it would promote exports, raise employment and boost growth, as well as dividing the tax burden equitably between manufacturing and services.

“The prospect of GST going into effect can be positive, but some states are holding back,” APL’s Frentzel explained. It’s based on logistics rather than tax factors and creates a uniform common market across India.”

A quick look at infrastructure

Infrastructure, long a problem in India, is slowly progressing. “The grand plans are there,” said Frentzel, “but execution hasn’t followed as quickly. There is investment, but there is a lot of work to be done. It’s mostly private investment.” That’s where adoption of the new FDI, with its requirement of 50 percent of investment in infrastructure (as noted above) will pay dividends.

When it comes to warehouses, there also is slow growth as Indian companies move from in-house operations to 3PLs that establish Warehouse Management Systems (WMS). It can often take several months to get the required permits to open a warehouse. Typically, warehouses in India are small, often as small as 5,000 square feet.

“Development of Grade A warehouses still is limited,” Frentzel said. “They’re going up, but not all A quality.”

What’s Frentzel’s advice? “Be extremely nimble and flexible, a jack of all trades. Work different transportation options, all modes—ground to rail to intermodal. Understand the trade lanes and continue to develop and improve infrastructure.”