Looking for the new India: strong economic growth and an increasingly open business environment has pushed India to the forefront of many Western corporations' minds. But poor infrastructure, widescale poverty and bureaucracy could slow any further improvements.

• Author: Smith, Tamsyn
• Position: Indian IT to benefit from FTA - Cover Story

For the uninitiated, the sensory invasion of walking down any Indian city street can be overwhelming. The country is simply too busy and too large to be ignored.

The same must now be said for the nation's economy, which in the past decade has had its nose to the grindstone in order to shed its downtrodden image and take its place on the world stage. A population of 1.03 billion (and one of the few countries to register annual growth of five per cent in the last five years), coupled with a business culture similar to the West thanks to a colonial heritage, means India at first glance presents an interesting proposition.

Companies from around the world are recognising this and are awakening to the notion that having a finger in the India pie is a wise business decision.

Elizabeth Sullivan, acting Austrade senior trade commissioner in New Delhi, says engagement with India in the short to long term is very significant for companies.

"Given that India has really only had 10 years of economic liberalisation, it gives a sense of what's to come," she said.

However, scratching the surface reveals that the country still has significant challenges to overcome. A large proportion of the population still live in poverty, and though the economy is growing, it is lumbered with a massive public-sector deficit, shaky infrastructure, an uncertain security situation and inhibiting bureaucracy. To succeed, India has a lot to overcome.

Image problem

India has built up a reputation as the best place in the world to employ cheap, highly skilled labour--a back office of the business world.

Robert Krakowiak, manager of export marketing and consulting for Australian Business Ltd (ABL), says the country has been targeted by many foreign companies looking for lower cost production facilities. Joint ventures, fully owned operations and out-sourced contract manufacturing were some of the more popular options.

According to the Economist Intelligence Unit (EIU), foreign direct investment (FDI) inflows into India grew by 65 per cent year-on-year to US$3.9 billion ($6.48 billion)in 2001/02. However, FDI accounts for only 0.9 per cent of India's GDP.

The EIU attributes this "under-performance" to poor image, coupled with restricting FBI policy, out-dated domestic policies, lack of foreign interest in disinvestment, weak regulation, and bureaucracy and red tape. It is not surprising, says the EIU, that only 220 of the Global Fortune 500 companies have any kind of presence in India.

Positive signs

However, there are signs that stalling government reforms to continue to open the nation to FDI may be due to gain momentum.

As an example, late last month the Government announced that it was considering allowing foreign investors to set up a new subsidiary in India without having to procure a no-objection certificate (NoC) from a partner if the old joint venture has ceased to operate. This is to be part of an impending package of measures to relax the rules for FDI, although it could take some time...