Why India’s Most Promising Sectors Fail to Deliver
Assistant Producer, CNBC Asia
India’s huge domestic market, youthful population and economic growth hold great promise for marketers amid a backdrop of global economic uncertainty.
Despite the recent slowdown, Asia’s third-largest economy has clocked growth rates close to 8 percent over the past five years, something the Western world cannot match. It has dream demographics — the average age of its 1.2 billion people is just 28 — plus rising incomes and a burgeoning middle class estimated close to 300 million makes India a “must-be” place for any company.
But the promise of India has not always been fulfilled. A complex market, where huge demand is matched with cut-throat competition and often an unfavorable regulatory environment has seen many firms in different sectors burn their fingers.
“From a distance, people oversimplify India saying it’s a great growth story, with great demographics and strong demand, but India is a complex market — geographically it is vast — with different levels of potential and social economic parameters,” said Siddhartha Sanyal, chief India economist at Barclays.
India began liberalizing its economy in the early 1990s, prompting the growth of private investment and the entry of multinational companies into the country; however, success for newcomers has not always come easy.
Two high-growth sectors in India — aviation and telecom — paint the picture better than any others. Booming passenger traffic and rapidly growing mobile phone penetration make these two sectors very attractive for investors, but both are plagued by chaos and diminishing returns.
Turbulence in the Air
“Rising incomes and growing demand in India are underexploited. Aviation is a prime example of that,” said Aninda Mitra, economist at ANZ Bank.
While India’s aviation sector has enjoyed rapid domestic passenger growth in the last decade, quadrupling from 13 million people to 52 million in 2011, according to CAPA (Centre for Aviation)just one of the six airlines operating in the country turned a profit in the financial year ended March 2012.
The potential of the sector has been choked by intense price competition and exorbitant operating costs owing to high airport and fuel taxes.
The government recently allowed foreign airlines to buy a 49 percent stake in domestic carriers in an attempt to ease the financing woes of the sector.
Kapil Kaul, CEO of CAPA South Asia, however, says it may be a while before foreign carriers dip their toes into the sector, given the dismal financial positions of the Indian airlines.
“Just because they are now allowed to invest does not necessarily mean they will — the balance sheets of most of the carriers are relatively weak, and the sector faces numerous structural challenges,” Kaul said.
Low cost carrier Indigo was the only profitable airline last year, while peers suffered deep losses with Kingfisher Airlines on the brink of bankruptcy.
Kingfisher, which has been behind on salary payments for months, is now grappling with labor unrest which has resulted in several flight cancellations.
“The high cost of doing aviation business in India is squeezing the lifeblood out of the airline sector. Infrastructure costs and taxes need urgent attention,” Tony Tyler, director general the International Air Transport Association (IATA), said earlier this year.
Fuel taxes in India add 30 percent to their oil bill, according to IATA estimates. Fuel accounts for 45 percent of total operating costs for India’s carriers, compared to a global average of 33 percent
“These structural issues are so big that we haven’t been able to overcome them; we have a list of negatives that keep overshadowing the potential of the aviation sector,” said Kaul.
Dialing the wrong number
Besides airlines, the telecom sector has also failed to live up to expectations, despite a rapidly expanding mobile phone subscriber base.
With 900 million mobile phone subscribers, India is currently the second largest mobile phone market after China. And mobile penetration is expected to rise to 72 percent by 2016 from 51 percent in 2012, according to research firm Gartner, as adoption rates in country’s rural areas grow.
However, an overcrowding of the space, which has led to a free-fall in tariffs, alongside continued regulatory uncertainty following a recent corruption scandal regarding the auction of second generation (2G) telecom licenses, has inhibited the success of mobile operators.
In 2005, India raised the foreign direct investment (FDI) limit in telecom services companies to 74 percent from 49 percent.
“With so many telecom licenses given out, the market is very competitive. New operators looking to get market share cut price without looking at the long term implications,” Jaideep Ghosh, partner at KPMG said, adding that “corresponding cut in costs haven’t come down so profitability declines.”
There are 12 mobile service providers in India compared to a global average of four per nation. The industry also has the lowest average revenue per user per month (ARPUs) in the world, at just one-third the levels seen in other developing markets, according to PricewaterhouseCoopers.
Bharti Airtel, the country’s biggest mobile phone operator, for example, posted 10 straight quarters of declining profits in the April-June period as hyper-competition squeezed its margins.
“The policy and regulatory environment across many industries is still evolving and remains restrictive. There are often unpleasant surprises from the regulator, and there is veiled protection of the government-owned incumbent players. Telecom and aviation are both great examples,” said Pramath Raj Sinha, former partner at Mckinsey & Company and the founding dean of the Indian School of Business.
In the aviation sector, a price war with state-owned Air India — which is able to provide cheaper fares because it is subsided by the government — has driven fares to unsustainably low levels.
“Air India’s politically-driven priorities of providing below market price products don’t work because it inhibits profitability and new investment into the sector,” Mitra said.
In the telecom sector, India’s apex court earlier this year ordered the government to revoke 122 2G telecom licenses issued in 2008 on claims of corruption in their allotment.
The cancellation of the licenses impacted companies including the local joint ventures of Norway's Telenor and Abu Dhabi's Etisalat and raised concerns about the sanctity of business contracts in India.
While aviation and telecom have come to represent India’s unrealized potential, the overall Indian market and consumer provides a daunting challenge for even the most experienced international marketers.
“In the first round of the Indian growth story – seen in the last decade – there was huge euphoria about the middle class consumer, which looked so simple at the face of it. But it has been a lot more complex than people thought,” said Dheeraj Sinha, chief strategy officer, South and Southeast Asia, Grey Worldwide.