Asian Market Update Series puts spotlight on India
4 June 2020: As a market, India should not be considered the next China, or a potential substitute for it, because there are significant key differences that make it unique.
This was a key message to emerge from the latest online seminar on India as part of the Asialink Business Asian Market Update Series.
The event was moderated by Mukund Narayanamurti (CEO, Asialink Business) and featured leading insights from Indian market experts:
- Ravneet Pawha – Global Deputy Vice President and CEO (South Asia), Deakin University
- Mary Manning – Portfolio Manager at Ellerston Capital
- Tarandeep Singh Ahuja – Partner at McKinsey & Company
The seminar was timely as it was held two days before the first Australia-India Leaders’ Virtual Summit on 4 June, between prime ministers Scott Morrison and Narendra Modi.
The leaders were to meet as both economies face serious economic challenges resulting from the COVID-19 pandemic. Separately, trade tensions between the U.S. and China are expected to result in a reorganisation of global supply chains and have also sparked debate around the need for greater diversification in trade and investment flows.
Australia’s India Economic Strategy (IES) to 2035 serves as a blueprint for Australia’s engagement with India and given current events has taken on a new level of importance.
The strategy sets ambitious targets for Australia to grow its exports to India three-fold to around $45 billion and investment 10-fold to more than $100 billion.
Education the flagship sector
Under the IES, education has been identified as the flagship sector. Deakin University last year celebrated 25 years in India and Ms Pawha said that going forward, international education would be a key driver of the Australia-India relationship.
All panellists agreed that India was a complex country to do business in and securing meaningful outcomes required long-term commitments. Having an active presence in the market was essential as business in India could not be done from a distance.
India is the world’s second largest international education market, with 40 million students. Ms Pawha said that education was not seen as an industry in India, but as a ‘sacred investment’. As a result, providers looking to succeed needed to invest ‘heart, head, and soul’ and not treat the student purely as a customer.
Ms Pawha said universities needed to be persistent, have the right people on the ground and build mutually beneficial partnerships. Australia needed to continue developing a strong, unified national brand to compete effectively against competitors from the U.S., U.K and Canada.
Traditionally in India, research has been primarily driven by government but that was changing with an increasing focus on universities. As a result, Australian universities had new opportunities to work with Indian institutions to enhance engagement in research outcomes.
Ms Pawha cited the TERI-Deakin Nanobiotechnology Centre as a successful example of collaboration. The centre of excellence opened in India in 2017 and specialises in research-based solutions in the areas of food and water security as well as bioenergy.
Along with opportunities in the tertiary sector, Mr Pawha said the high priority India had placed on skilling its workforce meant there would be huge demand for educational services into the future. Ultimately, we had to understand what India needs and what Australia has to offer and vice versa, she said.
And notwithstanding the need to have a presence in India, COVID-19 meant that organisations also must learn to do a lot more in virtual environments.
India is very different to China
Dr Manning manages the Ellerston India Fund among other Asian investments. She detailed why India is unique and not the next China. For example, the structures of the two economies are very different and beyond coal, exporting bulk commodities is not going to be the bedrock of Australia’s relationship with India.
India is also at a very different stage of economic development to China, with different consumer preferences, price points and distribution channels. These factors give rise to a completely different set of sectoral opportunities, that will most likely require capital investment on the ground – but one size does not fit all when it comes allocating capital in India.
Dr Manning cited several examples of successful investment in India by multi-national corporations that cut across geographies, sectors, time frames and business models, such as majority stakes in listed companies, through to unlisted joint ventures and distribution agreements. These companies include household names in Unilever, Suzuki, Prudential, Macquarie, Facebook, Alibaba, McDonalds, Walmart, and QBE.
Unilever has been involved in India since 1888 and today Hindustan Unilever (HUL) which was first publicly listed in 1956 – with Unilever maintaining a majority stake – is India’s largest FMCG company with a market capitalisation of over $100 billion and annual sales of over $8 billion.
HUL’s return on equity (ROE) is 83 per cent, significantly higher than the parent company’s ROE of approximately 46 per cent. HUK’s ‘Winning in Many India’s’ strategy has been a key driver of its success with a key focus on addressing diversity across cultures, spending habits, tastes and preferences in 14 different geographical clusters. Like China, India cannot be treated as one homogenous market.
Dr Manning said the higher returns on equity that could be achieved in India were a major reason why Australian companies should be considering investment opportunities there.
She said there was currently an investor scramble for ‘new economy’ assets in India in key areas such as healthcare and infrastructure and while good buying opportunities could present over the next six to 12 months for equity investors – with the Indian economy weakened by COVID-19 – a long-term view was needed.
Economic impact of COVID-19
McKinsey & Company have produced two recent research reports on the implications of COVID-19 on the Indian economy, including Getting ahead of coronavirus: Saving lives and livelihoods in India, which was based on interviews with 600 leaders, including senior economists, financial market experts and policy-makers, in 100 companies across multiple sectors.
The second report, Reopening India: Implications for economic activity and workers examines different economic scenarios for the reopening of the economy from lockdowns.
In providing a progress update on the IES, Mr Ahuja emphasised three key pillars, including economic imperatives, geopolitical aspects of the relationship and the people dimension. He said the people-to-people links between Australia and India were extremely strong citing the fact that India is now Australia’s largest source of migration with more than 700,000 Indians living in Australia.
Mr Ahuja said that progress to date with the IES had been very good with ongoing engagement among key stakeholders. He also highlighted India’s reciprocal economic strategy for Australia (the Australia Economic Strategy) along with an increasing interest among Indian companies to also invest in Australia.
He said the unprecedented impact of COVID-19 had however slowed momentum. He said less than 60 per cent of the Indian economy had been functioning and there was no immediate end to economic shutdowns within sight.
The government has so far committed to a sizeable stimulus the equivalent of around 10.5 per cent of GDP in attempt to soften the blow. Mr Ahuja said the period also presented an opportunity for major structural reform of the economy.
While in the short-term there would be an unavoidable slowing in the pace of the Australia-India relationship, he believed that over the medium to long-term there would not be a significant impact. If anything, he believed the relationship could strengthen as both countries pursued new growth opportunities particularly in areas which focussed on innovation and technology.