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India still faces several challenges

In India, several issues must still be resolved before it can move itself successfully into the future and draw direct foreign investment. Poverty tops the list.
/ Source: CNBC

In India, a country steeped in tradition with an economy poised to grow by 7 percent this year, several issues must still be resolved before it can move itself successfully into the future and draw direct foreign investment. Poverty tops the list.

“About 80 percent of India’s population lives on less than $2 a day,” said The World Bank’s Joelle Chasard.

The poor, with their many serious health problems, put pressure on an already-taxed infrastructure. And it’s something of serious concern for any company interested in doing business in India.

Nowhere are the contrasts that define India more stark than in Mumbai, where in the shaddo of the affluent financial district you will also find one of Asia’s largest slums and abject poverty. How India chooses to remedy that disparity will go a long way in determining its economic future.

Beyond poverty, there are major infrastructure issues. An outdated transportation system and a road network in desperate need of repair make it very difficult to move goods around, in turn driving up costs. And the power supply simply cannot keep up with demand.

“Most factories have to set up their own generating system,” Chasard said.

Bureaucratic difficulties
But getting power is just half the battle. One must also navigate the bureaucracy — one that makes even China look good.

“To start a new business in India, one needs on average about ten permits,” Chasard said. “By comparison, in China, one only needs six. As a result, one has calculated that on average it takes about 90 days for a business to set up in India.

And the reason so many barriers were put in place? Government protectionism.

“The government was in the business of running a business rather than running the government,” said Vic Bhagat, senior vice president of GE India.

With the government striving first to employ people, not produce profits, productivity and competitiveness took a back seat. But an increasing amount of investment from abroad has forced a change in political priorities.

“Suddenly you got competition — and what happens with competition? Rates drop, quality improved, so the government had to improve the quality to stay competitive,” Bhagat said.

But clearing the government’s hurtles isn’t the end of the game. After that, businesses enter another morass.

By most estimates, 90 percent of land titles in India are unclear, driving the cost of real estate to unimaginable heights.

“The real estate in Bombay is on a per capita basis more expensive than in Tokyo, Taipei and almost any other Asian city,” said Shirish Sankhe, an analyst for McKinsey and Co.

“It has been a roller coaster ride,” said Rajnikant Patel, cheif operating officer of the Bombay Stock Exchange.

“As we see now ... you see the capital market going up — the foregn direct investment, the interest of the foreign institutional investment over here has been tremendous.”

According to The World Bank however, because the national deficit is 10 percent of the GDP, interests rates are incredibly high.

“The fiscal imbalance is really not necessarily seen as a source of immediate crisis as we have seen in other countries — Argentina, Russia — a few years ago,” Chasard said.

Still, those high interest rats have deterred some foreign companies from investing.

Yet for others, benefits have outweighed the problems, and foreign entities have continued to flow into India.

“There is no quick buck to be made in India,” Sankhe said. “The markets that are deregulated are extremely competitive. The local companies are very good so when you come to India, come for the long haul.”