- India has overtaken China as the world's most populous country, and it's pushing for foreign investments.
- But foreign investors keen to enter the Indian market face various barriers to entry.
India is the next major economy to watch.
Earlier this year, India overtook China as the world's most populous country. As a large country with a young population — the median age is 28 — it's an enticing draw for companies looking to diversify their risks beyond China, which has been the factory of the world for 40 years.
Indian Prime Minister Narendra Modi's administration has also been on a drive to spur the country's economy through investments.
Among investors keen on investing in India are Tesla and SpaceX CEO Elon Musk, and tech giant Apple.
Even legendary emerging markets investor Mark Mobius, who's known for his bullish take on China, has recently touted India as "the real future."
But it isn't that easy operating in the world's largest democracy. Here's why:
1. India wants foreign investment — but it also wants to be self-reliant
India has a history of trade protectionism that makes it difficult to do business in the country, although Modi — who first came into power in 2014 — pledged economic reforms, including easing foreign direct investment policies.
Still, even as Modi champions foreign investment, his government also wants the nation to be self-reliant and has in fact kicked off such a campaign in May 2020 amid the COVID-19 pandemic.
While the two goals are not at odds, it does mean foreign businesses doing business in India face a complex landscape.
"US exporters are being pressured to start manufacturing their products locally to retain market access, particularly if similar goods are not already produced in India," the US International Trade Administration, or ITA, wrote in a market overview of India in September.
"The Indian government has consistently raised tariff and non-tariff barriers to protect domestic suppliers across most sectors and to bolster indigenous production," the ITA added.
2. Import taxes in India are some of the highest in the world's major economies
India's import taxes are some of the highest in the world among major economies.
India's simple average import tariffs hit 18.3% in 2021, according to World Bank data — far higher than the US' 3.4%. For imported cars, import tariffs can hit as much as 70% if they cost under $40,000.
So, even before Tesla CEO Elon Musk met Modi earlier this month, the EV maker was already lobbying the Indian government to slash import taxes on EVs before it agrees to start selling in the market.
In a tweet in July 2021, Musk wrote that India's import duties are "the highest in the world by far of any large country!"
But given the huge Indian market, Tesla isn't giving up. "I am confident that Tesla will be in India and will do so as soon as humanly possible," Musk told reporters on June 20.
3. Indian bureaucracy and red tape are notorious
As a large economy with a young population, India has the potential to be a manufacturing powerhouse. But the South Asian country is also infamous for its bureaucracy and red tape.
"It's far from a place where businesses can simply come in and open a shop without having too many company compliances," Ashutosh Sharma, a research director at market researcher Forrester, told Insider in December.
Since 2003, the World Bank has been running an annual ranking of countries based on their ease of doing business. In 2019 — the most recent year the index was compiled before the World Bank discontinued it due to a data-rigging scandal — India came in 63rd place. That's still behind China, which ranked 31st in 2019, but miles ahead of where it was a couple of years earlier. When Modi took office in 2014, India was ranked in 142nd place.
4. Indian states are even more powerful than their US counterparts
India is the world's largest democracy, so decision-making can get complicated.
"As a federal system, power and decision-making are decentralized in India, with differences at the state level in political leadership, quality of governance, regulations, taxation, and labor relations," the ITA wrote in a post in September outlining market challenges in India.
Indian states generally hold greater power than their US counterparts, which means businesses can face different operating conditions across various states and territories, according to the ITA.
China also has issues like compliance and licensing, but it can still move more quickly than India, simply because the South Asian nation is "much more democratic and there are just too many stakeholders to satisfy," said Sharma.
Business expansion in India requires a longer planning timeline and adopting strategies for different states, the ITA added, citing US companies already operating in the country.
5. India's tycoons already control swathes of the country's economy, and they wouldn't give up without a fight
As a large, emerging market, many of India's tycoons have already built business empires from its massive consumer base — and it's unlikely they will give up their market shares without a fight.
Even world-richest person Musk, who told reporters on June 20 he was keen to launch Starlink in India, is coming up against strong competition in the form of billionaire Mukesh Ambani, who is the chairman and managing director of conglomerate Reliance Industries
SpaceX — which owns Starlink — and Reliance have different stances on how the Indian government's satellite broadband spectrum should be distributed, Reuters reported.
Musk's Starlink is lobbying the Indian government to assign licenses for satellite service in line with the global practice, arguing it's a natural resource to be distributed among companies, according to Reuters. Ambani's Reliance Jio is taking the opposite stance and calling for a public auction to ensure a level playing field for both foreign and domestic players in the traditional telecom space.
Reliance will continue lobbying the Indian government for an auction, Reuters reported, citing an industry source with direct knowledge of the matter.