Ashvin Parekh, national leader, Global Financial Services, Ernst & Young, in India looks at the challenges and opportunities for businesses looking to trade with the sub-continent.

India is the fastest growing free-market democracy in the world clocking just about eight per cent growth in GDP in 2008.

Long term UN and World Bank forecasts to 2050 for India predict average annual per capita growth of 5 per cent, putting India well ahead of the G8. India’s diverse economy is driven by activities ranging from subsistence farming to capital intensive agriculture, handicrafts, cottage and SMEs to large scale manufacturing industries and a vibrant service sector.

India and UK share a rich tradition and historic ties. More than one million persons of Indian origin (PIO) live in the UK and it is India’s largest trading partner in the European Union. Indian companies are now investing in UK businesses more than ever before and several British firms are planning a foray into India.

It has been almost two decades since India opened its doors for foreign investment and there has been a sea change in terms of business opportunities. In recent years, there has been a large influx of foreign enterprises that have identified the potential market represented by 1.1 billion customers.

The increasing purchasing power of this emerging economy is leading to growing consumer spends. The National Council of Applied Economic Research (NCAER) data reveals that the middle class income is widening and disposable income is expected to grow at 8.5 per cent per annum until 2015.

The country has a promising talent pool, with the highest number of qualified engineers in the world, over 150 million English speakers and 50 per cent of its population are under the age of 35. This bodes well for firms setting up businesses in India because as the world business bandwagon chugs into the era of the knowledge economy, it is the availability of talented human capital which will create competitive advantage.

Although the opportunities in India are immense, there are significant challenges which exist. The colossal consumer base and the prevalent economic divide mean that any foreign entity needs to understand the market well before planning a business venture in India. It is a vast country with enormous diversity in terms of consumer types, geography and communities and most foreign entities face the challenge of segmenting this diverse set of customers and delivering specific products and services to meet differing needs.

In addition, regulatory challenges in the country may prove to be a dampener for foreign investors. The India growth story must be tempered with the impediments and risks that foreign business entities would face while setting up operations there.

According to a recent World Bank survey on the ‘Ease of doing business’ there are several regulatory pitfalls when a foreign entity decides to set up a business establishment in India. Principal among these are obtaining sanctions or licenses, taxation and ownership restrictions and the survey also ranks India low in ‘ease of enforcing contracts’ due to a sluggish legal system.

The taxation system remains non-uniform across states with the VAT regime still not fully implemented, and this poses difficulties with regard to costing and product pricing. Added to this, deregulation is still incomplete with limited foreign investments in various sectors like retail, banking, nuclear energy, residential property, selected agriculture and biotech activities being permitted.

Companies setting up shop in India also have to consider that the macroeconomic fundamentals of the country have been affected by high inflation, red tape and high government debt. International rating agency, Fitch, recently downgraded India’s long term local currency rating fearing further monitory tightening due to an increase in wholesale price index to 12 per cent. It also reduced the GDP growth forecast for FY09 and increased the central government deficit.

Furthermore, a few other hurdles that established foreign entities face are poor raw material quality, high expansion and logistics costs, inadequate power supply and the high cost of debt. Infrastructure challenges like bad roads and ill-equipped airports also exist.

Nevertheless, while launching and running a business in many other countries might be easier, it is improbable that they can find similar opportunities elsewhere as those available in India.

India and UK are similar in many ways. Both countries have market-based economies which embrace trade and commerce and strong work ethics, share attachment to democracy and fundamental rights and many of the regulations and the legal systems are similar.

Moreover, as both the countries enjoy healthy bilateral relations. UK firms undoubtedly will have a distinct advantage in doing business over other foreign entities in India.

What must not be forgotten is that there is phenomenal goodwill towards Britain in India that gives a competitive edge in trade and business relations which would be hard to match.