The spread of globalisation and liberalisation has made the world of business highly complex and competitive. The reduction in barriers to global expansion has allowed business organisations to take their work operations overseas and achieve the benefits of operating in multiple countries. Business organisations are trying to explore untapped markets that can offer them a competitive edge in the industry. Most of the business organisations are eyeing upon world’s largest developing countries, such as India, China, Russia, Thailand, Indonesia, Turkey, Nigeria, Mexico, etc. to expand their business operations and make use of economies of scale.
India, also known as the Republic of India, is a part of Asia and is the seventh largest country in the world. In terms of population, India stands as the second most populated country with over 1.2 billion people. The country ranked sixth in terms of GDP in 2017 and was declared to be the third largest country in terms of purchasing power parity. After the 1991 economic reforms, India became one of the fastest growing economies in the world (BBC News, 2018). Due to its large population, India faces a number of challenges, such as poverty, corruption, malnutrition, lack of employment, inadequate healthcare, etc. Out of the world’s top 15 information technology outsourcing companies, seven are based in India and as a result of this, India is considered to be the most suitable country for business expansion after the United States (IBEF, 2018).
PESTEL analysis is a framework that allows to assess the macro environment of a country on the basis of six different factors i.e. Political, Economic, Social and Technological. A PESTEL analysis of India is given below:
India is one of the largest democracies in the world and have a stable form of government that supports foreign direct investment. The government of the country has experienced an improvement in its political environment post liberalisation. Post 1991, India started abolishing the rule that required foreign industries to take licences for expansion in India (Giri & Debnath, 2016). Thereafter, the country has been increasing the percentage of FDI that is allowed in different sectors. As a result, a stable and an FDI friendly government makes India a suitable country for business expansion
India experiences high purchasing power parity and has a GDP that is aggressively growing year by year. A report by Pricewaterhouse Coopers, also known a PwC, in 2011 suggested that India’s GDP could overtake the GDP of the United States of America by 2045. A strong economy of the country has created a lot of potential for the overseas expansion of multinational organisations (Rahman, 2018)
India has the second largest population in the world and a lot of educated people are still looking for employment in the country. Further, a population of 1.2 billion people provides an excellent market for multinational organisation. The standard of living of the Indians is improving day by day and they have a good amount of disposable incomes to spend on high quality products and services.
India is one of the most advanced countries in the world. Some sources say that India is the 3rd most advanced country in terms of technology. India also has a lot of technological institutes and a large pool of technology professionals that are looking for job opportunities (Bhasin, 2018). Availability of large pools of IT professionals is one reason because of which some of the top multinational IT companies, such as Google, Facebook, etc. are investing in the country.
Over the last few decades, a lot of companies have expanded their operations in the Indian subcontinent while many other companies are trying to enter the Indian market. There are a number of factors that promote business expansion in India. Following are the factors that make India a prime location for business expansion:
Availability of resources: India is a country that is rich in natural as well as man-made resources. Business organisations operating in India get access to cheap electricity and raw material. Further, large population in the country has always been able to offer cheap labour to business organisations in abundance (Santander, 2018). Because of large population, there is still unemployment in the country and even highly professional candidates are looking for attractive job offers. The labour resources in India are also cheaper than many other countries because of low wage rates. As a result, availability of such resources can help business organisations in becoming more competitive in the global market.
Government policies: as discussed in the PEST analysis, the Indian government is a stable one and is attracting a lot of Foreign Direct Investments by offering lucrative opportunities for business organisations. In exchange of the investment that the foreign companies make in the country, they get cheap labour, resources and tax incentives as well (JaZaa Financial Advisory, 2016). The policies implemented by the government to invite FDI has moved India into the top 100 countries in the World Bank’s Ease of Doing Business global rankings (PTI, 2018).
Technology: Technology has been having a huge impact on the Indian population and the Indian market is experiencing a rapid shift from brick and mortar shops to e-commerce websites. A drastic increase in the number of online shoppers has made India one of the best places to expand business operations to.
Increase in income: Because of India’s rapid development rate and high GDP, there has been a great rise in the income of the people. Indian’s are enjoying a high purchasing power and are able to spare major portions of their incomes for expenditure. Further, there has also been an increase in the middle class consumers in the Indian market. As a result, it has become a great market opportunity for many business organisations.
The imbalance between the supply and demand in the foreign exchange market has been having an impact on the value of rupee, which has been depreciating against the dollar. Dollar has also experienced a great appreciation in the international market. The depreciating value of rupee has been having an effect on both higher and lower sectors of the economy. The rise in demand of oil in India year-by-year has decreased the value of rupee because the Indian government makes payment for oil imports in dollars.
Another reason for depreciation in the value of Rupee is the difference between the quality of Indian and foreign products. Indian manufacturers are not able to compete with foreign products in terms of quality and price, which increases the demand for import of foreign products. India has also been experiencing a decline in its foreign exchange reserves, which is creating a fiscal deficit. According to a number of studies, it has been discovered that for one unit fluctuation in the currency, there is a rise in 0.605 unit of FDI (Dwivedi, 2016). The decreasing value of rupee makes it easier for foreign companies and NRIs to invest in India because the power of their currency increases and they can buy resources that have a greater value than what they are spending. Overall, even if the value of the currency depreciates, India has been able to reap some benefits as an increase in the FDI because of currency fluctuations affects the country’s international wealth. It results in economic growth of India and the country has been developing in terms of technology and infrastructure as a result of it.
India is a top choice for foreign direct investment but the country has been facing a number of challenges with regard to its trade policies, economic slowdowns and protectionism. One area where the country has been facing problems is the decline of its manufacturing sector, which has resulted in an unsatisfactory experience with Regional Trade Agreements. The lack of innovation in other sectors, such as textiles, garments and pharmaceuticals has also been a major factor that has been having an effect on India’s trade policies (PURI, 2017).
The country has also been experiencing a frequent fluctuation in its currency value and Rupee touched down to its lowest level against US dollar in the last quarter of 2018. Some sources have also concluded Rupee as the worst performing Asian currency. To deal with the country’s currency downfall, the government has also started ‘Make In India’ campaign, which is aimed at promoting the manufacturing in the country and restricting import of foreign goods. ‘Make In India’ policy has been having a great impact on Foreign Direct Investments and trade policies of the country. The Department of Commerce in India has also strengthen its export policies recently and has included some new items under the Merchandise Exports from India Scheme to promote manufacturing and export in India (IBEF, 2018).
India has been a choice for Foreign Direct Investment for many business organisations since many years, which can be understood from the fact that the level of FDI in the country was found to be around USD 62 billion during 2017-2018. Within four years of the Modi government alone, the level of FDI increased to USD 222.75 billion from USD 152 billion (PTI, 2018). The first half of 2018 experienced an FDI of around 22 billion USD, according to a report by the UN. The FDI was experienced in that time when the global FDI was experiencing a downfall of about 41 percent because of the tax reforms carried out by the new government of the United States of America (PTI, 2018).
In 2018, India has received the maximum FDI inflows from Singapore, Mauritius, Japan, Netherlands and United Kingdom. The service sector in India receives maximum FDI from the United States, which is estimated to be around 2.43 billion USD (IBEF, 2018).
India offers a lot of business opportunities to multinational organisation, which has been a prime reason for an increase in foreign direct investment in the country over the past few years. The political, economic, technological and social factors in India promote foreign direct investment in the country while the depreciating value of rupee is making investment easier for NRIs and multinational organisation.
A major point that can be concluded from the above information is that the government of India is amending its trade policies, which has been having an impact on the products being imported in India. The government is trying to bring down its imports and increase its exports. For a company that wants to invest in India, it will be beneficial to setup a manufacturing unit in the country itself. As the government is restricting imports, a company operating in the Indian market by exporting products to the country can face difficulties in carrying out its business smoothly.
Overall, investing in India by establishing manufacturing units in the country can help business organisations in achieving economies of scale, reducing their overall operational costs and in becoming more profitable. Availability of a large pool of talented employees can also help investors in manufacturing high quality products and offering better services to the customers. Therefore, multinational organisations should look for expansion options in India before expanding into other countries.
BBC News, 2018. India country profile. [Online] Available at: https://www.bbc.com/news/world-south-asia-12557384[Accessed 12 December 2018].
Bhasin, H., 2018. PEST analysis – Political, economical, sociological, technological. [Online] Available at: https://www.marketing91.com/pest-analysis/[Accessed 12 December 2018].
Dwivedi, A., 2016. Relating exchange rate and inflow of foreign direct investment in India. [Online] Available at: https://www.projectguru.in/publications/exchange-rate-inflow-india/[Accessed 12 December 2018].
Giri, I. & Debnath, P., 2016. Political and legal system and foreign direct investment in India. [Online] Available at: https://www.projectguru.in/publications/political-egal-system-foreign-direct-investment-india/[Accessed 11 December 2018].
IBEF, 2018. FOREIGN DIRECT INVESTMENT (FDI). [Online] Available at: https://www.ibef.org/economy/foreign-direct-investment.aspx[Accessed 12 December 2018].
IBEF, 2018. FOREIGN TRADE POLICY OF INDIA. [Online] Available at: https://www.ibef.org/economy/trade-and-external-sector[Accessed 12 December 2018].
IBEF, 2018. Indian Economy Overview. [Online] Available at: https://www.ibef.org/economy/indian-economy-overview[Accessed 12 December 2018].
JaZaa Financial Advisory, 2016. 5 Strong Reasons To Invest In India. [Online] Available at: https://seekingalpha.com/article/3963358-5-strong-reasons-invest-india?page=2[Accessed 12 December 2018].
PTI, 2018. FDI in India rises to $61.96 billion in 2017-18: Government [Online] Available at: https://economictimes.indiatimes.com/markets/stocks/news/fdi-in-india-rises-to-61-96-billion-in-2017-18-government/articleshow/64506567.cms[Accessed 12 December 2018].
PTI, 2018. India attracts $ 22 bn FDI flows in first half of 2018: UN report. [Online] Available at: https://www.thehindubusinessline.com/economy/india-attracts-22-bn-fdi-flows-in-first-half-of-2018-un-report/article25233752.ece[Accessed 12 December 2018].
PTI, 2018. India remains preferred destination for FDI: RBI [Online] Available at: https://economictimes.indiatimes.com/news/economy/finance/india-remains-preferred-destination-for-fdi-rbi/articleshow/65593007.cms[Accessed 12 December 2018].
PURI, H. S., 2017. India’s Trade Policy Dilemma and the Role of Domestic Reform. [Online] Available at: https://carnegieindia.org/2017/02/16/india-s-trade-policy-dilemma-and-role-of-domestic-reform-pub-67946[Accessed 12 December 2018].
Rahman, M., 2018. PESTEL analysis of India. [Online] Available at: https://www.howandwhat.net/pestel-analysis-india/[Accessed 12 December 2018].
Santander, 2018. flag India INDIA: FOREIGN INVESTMENT. [Online] Available at: https://en.portal.santandertrade.com/establish-overseas/india/foreign-investment[Accessed 12 December 2018].
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