The Economic Infrastructure of India
Pam D. Stokes
January 12, 2003
Companies that want to globally expand must examine the economic infrastructure in countries that they are planning to enter. Although India has its benefits, the nation is constrained by a shoddy economic infrastructure consisting of power and electricity, telecommunications, roads, railways, ports, and airlines. The country is trying to make marked changes by soliciting private investors for infrastructure improvement. However, the progression of economic infrastructure in India is slow in coming. Since Staples Inc. is a rapidly expanding global business (primarily due to Internet sales), it would not benefit from entering the Indian market at this time. Costs for infrastructure are high in India, and Staples has recently revamped its business plans to save costs while accruing maximum profit.
Corporations wishing to expand globally should thoroughly examine the economic infrastructure of the country in which they desire to enter. The economic infrastructure “encompasses a number of services provided in a country to try to foster business activities, production, and consumption” (Sullivan, 1999, p. 475). These services can include power and electricity, telecommunications, water, sewage and sanitation, gas, roads, railways, ports, airports, and financial services such as banking and investing (Ibid). Identifying specific indicators of economic infrastructures will assist corporations in determining whether it is prudent for them to enter a certain country to conduct business. Such indicators would examine the power generating capacity, top-notch telecommunications, and reliable transportation of a country to ensure that its economic infrastructure is stable (p. 489 – 491). These areas are vital to a country’s ability to globally expand and compete. Therefore, India has much to accomplish.
Although India benefits from a diverse population and some available natural resources, the nation’s economic infrastructure “is a major constraint to higher rates of growth” (Country Profile, 2002, p. 19). As such, India’s government has increasingly emphasized the need to secure investment in major infrastructure projects; however, real progress has only been made in the telecommunications sector (Ibid). India realizes that telecommunications and the Internet are critical for future growth, but should recognize that other components of its economic infrastructure need to be adequately addressed in order to establish and maintain a fully operational economic system.
It is the combination of India’s shaky economic infrastructure and Staples’ halt on its store expansion plans that would ultimately impede the growth and operations of the office-supply company. Even with the decrease in retail stores, Staples Inc. “has been drawing more investor attention in the past few weeks, based on technical and fundamental grounds. Shares of Staples, one of the largest office-supply superstore chains in the U.S., have doubled in the past seven months – from $11.10 a share on September 27, 2001 to $20.39 on April 27, 2002” (Marcial, 2002, p. 1). The current stock price is $18.83 (as of January 10, 2003), down about $ 2.00 from April of 2002. As aforementioned, India has to fight to secure investment and funding for its troubled infrastructure. In addition, Staples’ expansion retreat comes amid signs of a maturing, stable market (Pereira, 2002, p. 2). Therefore, an important question should be considered: why would Staples expand to India?
The transportation infrastructure in India consists of railways, roads, ports, and airlines. The country supports the world’s most extensive rail network, at 62,800 km and 1.6 million employees. “However, passenger traffic is heavily subsidized by higher charges for moving freight, increasingly forcing freight on to the roads (Country Profile, p. 19). In addition, railway safety has also become a significant issue due to many recent accidents underlining a lack of investment (Ibid). In an effort to improve this outlook, India is encouraging private participation and is examining alternative ways to increase railway funding.
The increased freight on the roads of India poses a significant problem for its infrastructure. The country has a poor road network, most of which are badly maintained and highly congested; however, it “has received renewed emphasis in recent years” (Country Profile, p. 20). There are some major road projects underway in India, with one project that specifically focuses on connecting the four corners of India, as dictated by India’s prime minister, Atal Behari Vajpayee (EIU Country Report, 2002, p. 30). This endeavor is estimated to cost US $11 billion and will take approximately eight years. A Central Road fund, established in November 2000, will help to guarantee funds for the upkeep and development of the National Highways Development Project’s road network. This project seeks to expand the rural roads, as well as expand the main roads to four and six lane roads (Ibid). However, even with these much needed changes, India’s roads are still poor. The road expansion is not consistently keeping pace with the population expansion.
India has 11 major ports, which are managed by the Port Trust of India (Country Profile, p. 20). Five of these ports are on the east coast of India and six are on the west coast (Ibid). These ports handle 82 percent of cargo and are operating beyond their capacity. To this end, delays in cargo delivery are commonplace. The India government has tried to tackle these problems by implementing port and harbor construction projects similar to the road construction initiatives. The country has made some progress with attracting the private sector participation in port and harbor development (Ibid).
Indian Airlines, the state owned domestic carrier, has maintained a dominant position in air transport despite the allowance for private domestic operators (Country Profile, p. 21). However, the state-owned international carrier, Air India, “has suffered continuous losses, owing to increased competition, a rising wage bill, and the depreciation of the rupee” (Ibid). Despite strong political resistance, the Indian government is looking to privatize both airlines.
India’s energy provision is a major limitation to the country’s economic infrastructure. Although the total power generated in India has continued to increase, there are significant shortages (Country Profile, p. 22). As is the case with transportation issues, India’s power and energy capacities urgently require significant private investment because the public sector does not possess the necessary resources to improve the dilemma. “After decades of neglect, the public sector lacks the necessary resources and the private sector is unwilling to fill the gap, deterred by the fact that the main electricity purchasers – the State Electricity Boards (SEBs) – are bankrupt” (Ibid). Further, the collapse of the Dabhol power project (India’s largest foreign investment to date) and the bankruptcy of Enron, the Dabhol Power Corporation (DPC), “is in danger of falling into disrepair” (EIU Country Report, p. 32). “One of the best ways to assess power infrastructure is to examine [a country’s] financing (Sullivan, p. 489). Thus, it becomes evident that India’s power capacity is deficient.
India’s telecommunications sector has experienced recent and rapid growth. “A number of private companies that have been given licenses for land based services have been laying telephone cable lines” (EIU Country Report, p. 31). This is in response to the low amount of telephone lines and connectivity across India. In addition, “Internet connectivity remains low, although numbers are expected to increase rapidly” (Country Profile, p. 21). The Indian government formed a Communications Commission to address licensing and regulation issues with regards to the Internet, telecom, and broadcasting. This commission replaces the existing Telecoms Regulatory Authority of India (TRAI) (Ibid). Still, “clearly countries like India cannot develop into the success story which Taiwan has become without telecommunications structure (Sullivan, p. 491). Once this is accomplished, costs for such services will be lower and more affordable.
Financial services in India are also in turmoil. Specifically, the Unit Trust of India’s (UTI) US-64 was facing extreme difficulty (EIU Country Report, p. 33). Privileged access to such bank funds ended in the early 1990’s; thus the proportion of equities was raised to continue giving high returns. When equity prices fell in 1996, massive withdrawals of bank funds ensued. In addition, the state owned India Credit and Investment Corporation of India (ICICI) was also affected when it was severed in 1992 from cheap bank funds (Ibid).
India supports a labor force of 400 million workers (Chemical Business, 2002, p. 3). However, India’s businesses, corporations, and government are overrun with corruption at all levels. In addition, “an unsympathetic bureaucracy, delays, lack of accountability, and transparency have deterred foreign investors from investing in India” (Ibid). A complete revamping of India’s infrastructure is the only way that the Indian business industry will become globally competitive and attractive for foreign and domestic investors.
Staples Inc. has recently experienced a rapid earnings increase. “The base building that the stock has put in place – coupled with the return of institutional investors as demonstrate by the increased money flowing into the stock – suggests that Staples can reach $30 a share in the next six to nine months” (Marcial, p 2). Interestingly, the company’s current stock price is $18.83, far from this earlier prediction. Since the rapid growth and cessation of its store expansion plans, investing in India would be a ruinous decision at this time.
One rapid economic growth area for Staples is its “Internet sales in North America, which doubled last year to about $1 billion” (Marcial, p. 2). This growth is expected to continue to increase in 2003. Therefore, it is not wise for the company to invest in India, a country with a frail telecommunications and Internet infrastructure, particularly if they are looking to increase their Internet sales across the globe.
Even though Staples has experienced increased growth and better than expected earnings this past year, the company still had to close 30 of its underperforming stores (Prior, 2002, p. 1). This, along with the plans to stop expansion, was probably done to stay competitive in a tumultuous economic environment. In addition, Staples plans to continue focusing on small business and power users, its most profitable consumers (Ibid). To accomplish this, the retailer needs to be able to perform and deliver its products and services in real time, with no bureaucratic red tape or shoddy infrastructures. India’s entire economic infrastructure is less than desirable for foreign investors and global business.
A Central Road fund has been established in India to improve the poor road conditions and to develop a road network. In order to conduct efficient business, Staples has to have its office supplies delivered to its stores and customers on time. India’s road infrastructure so poorly maintained and extremely congested that it would not be possible for Staples to deliver the products and services in a timely fashion.
Although the India government has planned to set up an infrastructure fund of U.S. $10.2 million to finance projects in India over the next four to five years, this fund may not cover the increased costs due to lack of private investors (Emerging Markets Economy, 2002, p. 1). The high costs of infrastructure are an extremely heavy burden on the Indian economy. In addition, “the Associated Chambers of Commerce and Industry of India (Assocham), has reported that at least U.S. $213.7 million has been wasted on 34 infrastructure projects for state owned enterprises that have been abandoned or frozen” (Emerging Markets Economy, p. 1). As such, Staples would make an enormous mistake if it decided to invest in India.
In addressing the question posed in the introduction, there is no legitimately good reason for Staples to expand their operations to India at this juncture. Even with its profound accomplishments and gradual changes in some components of the economic infrastructure, India has failed to address its massive economic infrastructure problems. In addition to focusing on this issue, the country could examine how the workforce is affected by its poor infrastructure. “India must take a cue from China, where wages are fixed and a disciplined workforce is working hard to enhance national productivity” (Chemical Business, p. 2). As a step in this direction, India labor unions have frozen worker wages and bonuses to generate more employment opportunities (Ibid). This and a strong focus on the Indian economic infrastructure will enable the country to play in the global arena in the future.
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