INDIA & GLOBALISATIONFINANCIAL TIMES SPECIAL REPORT | Thursday January 26 2012

www.ft.com/india­2012 | twitter.com/ftreports

Inside this issueEconomyBusinessleaders andeconomistswarn of‘excessivepessimism’;the IFC’sLars Thunell (pictured)stresses the importance ofdomestic demand Page 2

Airlines Ailing privatecarriers get that sinkingfeeling Page 2

Retailing The outlook forforeign groups after a keyreform is shelved Page 3

Online shoppingThe arrival of baby goodssites heralds big changesPage 3

LuxurybrandsBig globalnames arelookingbeyond theobstaclesas theyknow India

will be a crucial marketPage 3

Higher education Placesat top quality universitiesare in short supply Page 3

Outsourcing Old image ofIndian groups dies hard asnew aims are set Page 4

Corporate profile Theoutgoing chief at Tata is incautious mood Page 4

Car industry Gujarat hasstruck out on its own andwooed big names Page 4

More on FT.Com Profile ofKaraturi Global, which hasblossomedinto theworld’slargestrosegrower;trackingdown globalcoal suppliesto fuelgrowth hasits pitfalls;real estatedevelopers hope fora better yearwww.ft.com/india­2012

The Mahindra & Mahin-dra stand at the Delhimotor show tells a storyof powerful domestic

demand and undimmed globalambition.

Thousands of young peopleswarm around gleaming sportsSUVs, electric cars and trucks,even before the show hasopened to the public.

From a balcony above thefray, Anand Mahindra, manag-ing director, is laying out hisplans to make his car marque aglobal one in the years ahead.

A milestone on the way hasbeen passed. His company hasjust overtaken Illinois-basedJohn Deere as the world’s larg-est tractor producer by volume,propelled by India’s buoyantrural economy.

At Mr Mahindra’s side are hisKorean partners. He boughtSsangyong, the Korean car-maker, last year for $400m, andso far has done a better job thanits previous Chinese owners,Shanghai Automotive IndustryCorporation.

Now, the Mumbai-based busi-nessman is keeping his “peri-scope up”, he says, for otheropportunities in a depressed glo-bal market.

At a time of tumult in globalmarkets, and uncertain outlook

in the US and Europe, Mr Mahi-ndra’s ambitions are striking.They are a reminder that with afast-growing economy at theirback and entrepreneurial flair,India’s family-owned, cash-richgroups are still in the mood forinternational expansion.

Some of India’s global leadersare, however, battening downthe hatches. Ratan Tata, the 74-year-old chairman of the TataGroup and owner of the UK carmarques Jaguar and LandRover, has ruled out new acqui-sitions and told his employeesto brace for austerity.

As with Mr Mahindra, he isturning to markets among Briceconomies and fast-growingAsian countries such as Malay-sia, Indonesia and Thailand.

Many industrialists and bank-ers have been discouraged by adismal year at home. India’seconomic growth has slippedfrom earlier forecasts of 9 percent to 7 per cent for this fiscalyear. Some independent fore-casts predict nearer 6 per cent.

Double digit growth, saysRichard Iley, economist atFrench bank BNP Paribas, isfirmly in the “rear view mirror”.

Pessimism has grown aboutIndia’s prospects after monthsof political bickering and a highprofile corruption scandal in thetelecoms sector.

The edge has been furthertaken off an earlier mood ofeuphoria in the business com-munity by near double-digitinflation, rising borrowing costsand delays in governmentapprovals.

Expectations that ManmohanSingh, the prime minister and a

respected economist, would usehis second term in office forbold reforms have quicklydrained away. Instead, the Con-gress party-led coalition has suf-fered repeated setbacks at thehands of the opposition, itsallies and civil society activists.

Amid a policy paralysis, thegovernment was assailed duringthe second half of last year byan anti-corruption movementthat brought middle-class Indi-ans out on to the streets to pro-test against poor governanceand widespread cheating.

“We in India have had ourshare of problems. The Indianeconomy slowed down and infla-tion edged up. Concern aboutcorruption moved to the centrestage,” acknowledges Mr Singh.

To add to its woes, the govern-ment made an embarrassingU-turn on allowing greater for-

eign investment in multi-brandretail (supermarkets). A taxoverhaul, described by AdiGodrej, the chairman of con-sumer group Godrej, as one ofthe biggest catalysts to boosteconomic growth, has stalled.

Such setbacks have fuelledspeculation about differencesbetween Mr Singh and SoniaGandhi, the left-leaning presi-dent of the ruling Congressparty. They have also sharpenedexpectations of the succession ofRahul, her son, as premier.

The financial markets exactedtheir punishment. An exit of for-eign capital was reflected bySensex, the benchmark index onthe Bombay Stock Exchange,languishing as one of theworld’s worst performers lastyear. Likewise, the rupee fell 16per cent over the year.

Foreign direct investment

slumped from a previous $24bnto $19bn in 2011, just at a timewhen policymakers were tryingto entice foreign partners tobuild infrastructure.

Export growth, which rosesharply in the first half of theyear as new markets such asLatin America, Africa and Asiaopened up, has slowed.

Many senior economists, suchas Shankar Acharya, an econo-mist at the Indian Council forResearch on International Eco-nomic Relations, considerIndia’s problems largely homeg-rown, and fear 2012 will be atough year.

Such were the high-tempodomestic preoccupations thatthey have almost entirelyeclipsed both the global outlookof the previous year – whenIndia played host to the leadersof the UN Security Council Per-

manent Five powers – and moretraditional anxieties aboutneighbouring Pakistan andChina.

Economists have steadilybecome more downbeat. “2011[was] an unfortunate cocktail ofdomestic policy issues and aslowing global environment,”says Rohini Malkani, economistfor Citigroup in Mumbai.

“India is not beyond repair.Measures that will help includeincentivising investments,attracting foreign exchangeflows and executing proposedfiscal reform.”

Mr Singh has responded thisyear with an effort to get backon the offensive. He is underpressure to halt the decline, anddefy critics of his administra-tion’s inaction.

Undimmedambition aseconomy’slights f lickerGrowth has slowed athome but cash­rich,family­owned groupsare still in the mood toexpand overseas,writes James Lamont

A clean sweep? A billboard for the state assembly elections including, centre, Sonia Gandhi, Congress Party president Getty

Continued on Page 2

2 ★ FINANCIAL TIMES THURSDAY JANUARY 26 2012

India & Globalisation

The prime minister has openedequity markets to more foreigninvestment. Foreign single-brand retailers, such as Swe-den’s Ikea and the UK’s Marksand Spencer, have been giventhe right to own their Indianstores outright. However. Ikea iswithholding entry into India asit sees a requirement that sin-gle-brand retailers source 30 percent of goods from local smalland medium-sized companies asan obstacle to investment thatneeds reviewing.

Mr Singh’s latest move is astimulus package with $35bn ofpublic sector investment, forc-ing state-owned companies suchas Coal India and the Oil andNatural Gas Corporation toinvest cash piles to strengthenthe country’s energy security.

European diplomats speakmore enthusiastically aboutreaching a long-awaited bilat-eral trade deal between Euro-pean Union and India in comingweeks once sticking points overcars, wines and spirits, servicesand migration are overcome.

“In the last three weeksthere’s been a definite intent tomove things along [by the gov-ernment],” says SamiranChakraborty, head of researchat Standard Chartered Bank inMumbai. “There’s an impressionlegislation is not possible, butexecutive decisions can happen.There seems to be someurgency.”

“Amid the pervasive gloom, afew signs are pointing to bettertimes returning sooner ratherthan later,” says AnandShanbhag, head of research atAvendus Capital, a Mumbai-based investment bank.

The view from outside a shel-tered, domestically-driven econ-omy is more optimistic. BenVerwaayen, chief executive ofAlcatel-Lucent, the telecomscompany, says the pessimismabout India’s economy is “over-done” when compared with theoutlook in western markets.

Sanjeev Dhuna, a partner atLondon-based law firm Allen &Overy, says a bad 2011 has notderailed India’s globalisation.Lower stock market valuationsand a depreciated rupee couldrevive greater inward M&Aactivity in the second half. He

also expects more outwardinvestments by Indian compa-nies in resources, and in Africa.

“The underlying reason forglobalisation does not change,”Mr Dhuna says. “Indian compa-nies are looking very aggres-sively at what’s out there. Therewill be acquisitions in Africa.It’s the next frontier.”

Although some policymakerssaid India cannot grow above 8per cent without inflictingunbearable price pressure on itsrural population, Mr Singh atleast has not lost touch with thedream of taking India to double-digit growth to rival China.

“We need to do more thanhalt the current slowdown,” hesays. He has identified as priori-ties agricultural output, boost-ing industrialisation and manag-ing better rapid urbanisation.

A worry is the country’s fiscalposition, a blight of past admin-istrations, and uncomfortableexternal sector management ofthe current account deficit andforeign borrowings.

The national budget, pre-sented in March by finance min-ister Pranab Mukherjee, isexpected to bring an admissionthat a fiscal deficit target of 4.6per cent will be missed.

Fiscal restraint will becomemore difficult the nearer theCongress party gets to 2014 par-liamentary elections, which areoften won by doling out freebiesand welfare programmes to thepoor. Already a vote-winningfood security bill is in theworks.

The second half of this yearmay bring a bounceback. Elec-tions in five states in Februaryand March will be over, and theresults may give the Congressparty a reboot. As importantly,the interest rate cycle is likelyto turn and the RBI begins tocut rates that have risen stead-ily over the past two years.

“There was a party going onand it’s as if suddenly the lightswent out,” says Mr Mahindra ofbusiness sentiment.

“There isn’t a firm hand guid-ing you back to the switch. Butin India the lights go out quitefrequently. The generator kicksin and the lights go on again.We will get 6 per cent growth.But the question is when willwe get back to 8 per centgrowth?”

Ambitionbright butlightsf lickerContinued from Page 1

India’s airline industry is on theverge of crisis. After a decadethat saw all leading carriersexpand their operations, mostindustry analysts predict that2012 will be the year when anIndian airline will go bankrupt.

Extortionate taxes, high fuelprices and a bruising price warset in motion by state-run AirIndia are the main challengesIndia’s private airlines face.

Jet Airways, SpiceJet andKingfisher, India’s three listedairlines, all lost more than 60per cent of their market value in2011.

Meanwhile, Air India is stillflying thanks to a series of gov-ernment bail-outs that havekept the national carrier air-borne. However, analysts saystate aid has seriously distortedthe market and contributed tothe sector’s financial troubles.

Indigo, a private sector carrierthat is not listed on the stockexchange, is the only profitableairline in the country. Butnobody really knows its secret.

The sector’s ailing conditionsseem inexplicable given thatIndia’s passenger numberssoared nearly 20 per cent in 2011to nearly 60m fliers comparedwith the previous year, andcapacity is expected to be out-stripped by a surge in demand.

Yet the airlines are still bleed-ing red ink and are heavilydependent on bank loans to stayin business.

The carrier in by far the mostcritical condition is Kingfisher,controlled by Vijay Mallya, theflamboyant billionaire and liq-uor tycoon.

“It is very likely that one air-line will go bust this year andthe most likely candidate isKingfisher,” says Jasdeep Walia,an aviation analyst at KotakMahindra, a Mumbai-basedbank. “They are running out oftime to find a solution to theirproblems.”

With net debt of about$1.25bn, Kingfisher is belea-guered by a series of problems,including loan payment defaultsand penalties linked to unpaidtaxes and salary dues.

The tycoon’s airline has inter-est expense to net sales ratio of21 per cent, against 6.8 per centfor its main Indian competitor,Jet Airways.

In September Kingfisherdecided to shut down its low-cost operations to cut costs andfocus more on its premium andhigher yielding business. How-ever, this was not enough torein in the group’s mountingdebts.

In November it slashed 50 outof 340 of its premium flights andthis month the country’s avia-tion regulator warned that itsfinancial troubles could affectpassenger safety. Kingfishersaid it was operating all itsflights with “utmost safety”.

All this is having an impacton the airline’s market share.Passengers, who once took pride

in travelling with Kingfisher asit was rated as one of India’sbest airlines, have started todesert the carrier.

Since its financial problemsemerged late last year, King-fisher has fallen from India’ssecond-largest domestic airline –carrying just under a fifth ofdomestic passengers – to fifthplace, transporting 14 per centof the 55m people flying inIndia.

Most airline experts and thegovernment’s aviation ministerthink that foreign investmentcould provide some respite tothe ailing industry.

A government-backed panelrecommended a radical reformearly this year that would allowforeign carriers such as BritishAirways, Lufthansa and Singa-pore Airlines to invest up to 49per cent in domestic operators.

The entry of foreign airlines,which are not allowed to makeany investments in India, couldprovide a vital lifeline to thecountry’s cash-strapped carriers,analysts say.

“This is good news [for Indianairlines] as they desperatelyneed the cash,” says Sharan Lil-laney, an aviation analyst atMumbai-based Angel Broking.“It would be an absolute game

changer for Indian carriers asthey would join a bigger net-work of airlines and it wouldimprove the quality of theirservices.”

British Airways, SingaporeAirlines and Lufthansa areamong a number of airlines thathave often been rumoured aspotentially interested in enter-ing India’s fast growing market.

However, some analysts fearthat the government’s move toopen the industry might havecome a little too late to save it,and in particular Kingfisher.

Mahantesh Sabarad, an avia-tion analyst at Fortune Equity,a Mumbai-based brokerage, saysforeign airlines would bedeterred by India’s tough oper-ating environment and the poorstate of domestic airlines’finances.

“I doubt we would see foreignairlines rushing into the Indianmarket given [its] current condi-tion,” says Mr Sabarad. “They[Indian airlines] need to fix theirproblems before they canbecome attractive to foreignbuyers.”

Analysts say there is little air-lines can do to address theirproblems, as most of the chal-lenges they face are out of theircontrol.

Mr Walia at Kotak says slash-ing airport and fuel taxes, aswell as stopping the bail-out ofthe national carrier, would helpprivate airlines to push up theirticket prices and boost margins.

But that is very unlikely, sayindustry experts. Moreover, itall might be too little, too late toprevent one of the main airlinesgoing bankrupt.

Ailing private carriers get that sinking feelingAirlinesThe sector is defyingfinancial gravity,writes JamesFontanella­Khan

Wings clipped: Kingfisher’s condition is critical, say analysts Alamy

Interview IFC’s Lars Thunell stresses importance of domestic demandEurope’s sovereign debt crisishas served as a convenientscapegoat for India’s domestictribulations in past months.

Respected Indian economistssuch as Shankar Acharya fear fortheir country’s outlook in 2012and beyond, but they differ fromsenior policymakers by arguingthat the reasons forunderperforming equity marketsand local currency lie at home.

India remains a shelteredeconomy, protected byrestrictions on capital flows andmarket instruments, with alargely domestically­driven growthstory. Exports represent only 18.5per cent of GDP, compared withChina’s 30 per cent.

Nonetheless, India’s increasingglobalisation over the past 20years has made it vulnerable toshocks from big trading partnerssuch as the US and Europethough not as sensitive aseconomies in Latin America,Africa and elsewhere in Asia.

One threat to global trading,and to India, is the severecontraction in the balance sheetsof stressed European banks,according to the InternationalFinance Corporation, the private

sector arm of the World Bank.The short term effect on India,

China and Brazil for trade flows,direct investments, bond andequity flows and remittances isworrying.

“We are an interdependentglobal financial market,” saysLars Thunell, the IFC’s chiefexecutive, in an interview withthe Financial Times in New Delhi.

“Emerging markets must try tokeep their economies goingbased on domestic demand asmuch as possible. The debateabout domestic consumption inIndia, China and Indonesia isimportant.”

The retreat of Europeancapital, however, presentsopportunities for financialinstitutions from big emergingmarkets.

“For local banks in India andChina this is an opportunity topick up good assets,” hepredicts.

“We’ll see a new ownershipstructure ... This is the time whenwe may see some Chinese orIndian banks getting intoEurope.”

India represents theWashington­based IFC’s single

largest investment portfolio. Lastyear, it was worth about $3.5bn,10 per cent of the globalportfolio. The group plans afurther $1bn investment this yearwith a focus on supportingentrepreneurial companiesworking with the world’s poorestpeople.

A key target market is peopleliving off $3.5 a day, andsupporting investments in solarand hydro power and water in

India’s poorest states.Mr Thunell identifies global

opportunities for a group of fast­growing Indian companies – inareas such as logistics, farmingand financial services – that aredeveloping “inclusive businessmodels” to serve low incomecustomers. The operations andproducts of companies such asJain Irrigation, Bharti Airtel andFino, a Mumbai­based financial

services company, have thepotential to take root in populousmarkets in Indonesia, Nigeria andEthiopia.

Their innovation may also findacceptance in developed marketsthat are embracing austerity.

“Indian companies are leadersat getting to the bottom of thepyramid. They have a nationaladvantage in the number ofpeople [they can reach]. Indiancompanies have extraordinaryscale,” he says.

“When I first met Fino, theywere aiming at 1m [customers].They are now at 38m and theyare aiming for 100m. That can’thappen in many countries aroundthe world.”

Such dynamism is unusual inthe current global context. It mayhelp India weather an exit ofcapital from the global tradingsystem. Senior IFC executivesalso expect it to hasten a shift inproductivity and wealthgeneration towards emergingmarkets that economistspredicted would take 20 years,but now may take as little asfive.

James Lamont

India’s policymakers havebattled grimly over thepast year to bring downnear double-digit inflation,

the highest among Bric nations(which encompass Brazil, Rus-sia and China, too).

Signs are that they are finallywinning, but only as economicgrowth slows from a forecast forthe year of 8.5 per cent to below7 per cent.

Some economists predict thatinflation will fall from the 9 percent and above that persistedfor most of 2011t o an annualrate of 6.5 per cent in January.By April, inflation could bebelow 6 per cent.

“Rather than economicgrowth, we expect downside sur-prises to come through on infla-tion,” says Robert Prior-Wandes-forde, economist at CreditSuisse in Singapore.

The achievement has come ata price.

To the growing consternationof the country’s industrialists,policymakers have leant heavilyon monetary tightening to reinback rising prices in the fastestgrowing large economy afterChina. The central bank haslifted benchmark lending rates13 times over the past twoyears.

The central bank’s critics sayit has been “behind the curve”

in the fight against inflation andhas continued lifting rates whenother emerging markets havebegun to cut them to protectgrowth rates. They say it actedtoo timidly early on, with smallrises in lending rates, and toolate to stop a spread of fast ris-ing food prices into more gener-alised inflation.

“The Reserve Bank of Indiawas initially caught off guard asinflation rose in the post-crisisrecovery, and then was toomeek when it decided to hit thebrakes,” says Glenn Levine, sen-ior economist at Moody’s Ana-lytics. “This has produced theworst of both worlds: growthhas been hit but with no notice-able effect on inflation.”

Industrialists blame higherborrowing costs for choking offgrowth and deterring invest-ment. But in the first weeks of2012, there are encouragingsigns that the inflationary tideis turning. Food inflation, a keysource of rising prices over thepast three years, has droppedsharply in past weeks.

Pranab Mukherjee, thefinance minister, has spoken ofa “substantial improvement”.

Better still, the RBI has sig-nalled that the interest ratecycle has now peaked. Rate cutsare likely in the coming months.The first cut in the repo ratecould come in April, say someeconomists, possibly evenbefore.

“We have seen the worst ofthe [rate] rises,” says KaushikBasu, the finance ministry’schief economic adviser.

Reducing stubbornly highinflation could not come soonenough. Inflation is viewed as apowerful vote loser in India asrival political parties square upfor a crucial election in UttarPradesh, India’s most populousstate, next month. It has repeat-edly defied repeated forecasts byManmohan Singh, the primeminister, and Montek SinghAhluwalia, one of his chiefadvisers, of a cooling.

C. Rangarajan, Mr Singh’schief economic adviser, fore-casts that inflation may now fallbelow 7 per cent by the end ofMarch. He remains convincedthat India, a country of 1.2bnmostly poor people, must bringinflation down towards a morecomfortable rate of no morethan 5 per cent to achieve sus-tainable growth.

Others in the central banksimilarly hold the view that theIndian economy cannot growabove 8 per cent without inflict-ing unsustainably high inflationon the nation’s poor.

Some prominent businessleaders do not agree. RatanTata, the chairman of the TataGroup, has appealed to the gov-ernment to prioritise India’s

high growth rates over inflationand considers this goal worthyof living with higher prices.

He and others have alsoappealed to the Congress-ledgovernment to push ahead withstructural reform and addresssupply constraints by encourag-ing greater domestic investmentand improving the country’sdecrepit infrastructure.

Many senior economists warnagainst what they call “exces-sive pessimism”.

Arvind Panagariya, economistat Columbia University in theUS, says India can quickly

recover the 2 percentage pointsof economic growth that it haslost during the global financialcrisis.

Former World Bank chiefeconomist Joseph Stiglitz callsgrowth of 7 per cent this year an“achievement” in a global down-turn. To do better, policymakersneed a road map to moderniseand open the economy.

India is better placed thanother Brics, says Nouriel Rou-bini, economist at New YorkUniversity’s Stern School ofBusiness. But he warns thatAsia’s third-largest economy has

to grow at 9 per cent economicgrowth to tackle its socioeco-nomic and fiscal problems.

Yet high inflation makes Indiaan outlier among emergingeconomies. A new worry hasemerged. The RBI is anxiousabout the weaker rupee, whichfell to record lows against theUS dollar at the end of last year.It fears that currency deprecia-tion in a country that runs acurrent account deficit andimports most of its oil may fuelimported inflation this year.

Cooling rising prices is a keytest for 2012.

Debate overgrowth afterfight to triminf lation rateEconomyJames Lamont findsbusiness leaders andeconomists warning of‘excessive pessimism’

‘The Reserve Bankwas initially caught offguard as inflation rose. . . and was too meek

when it decided to hitthe brakes’

GDP growth

Sources: IMF; Thomson Reuters Datastream * 2011: estimates ** 2012-15: forecasts

At constant prices (% change)

-10

-5

0

5

10

15

2000 05 10 15

BrazilChinaIndia Russia

InflationAverage consumer prices (% change)

0

5

10

15

20

2000 05 10 15

BrazilChinaIndiaRussia

ExportsAs a % of GDP

ImportsAs a % of GDP

0

10

20

30

40

50

2000 2005 2010

BrazilChina

IndiaRussia

BrazilChina

IndiaRussia

* *** **

0

5

10

15

20

25

30

2000 2005 2010

There is anopportunity forIndian andChinese banksto pick up goodassets, saysLars Thunell

Analysts say state aidhas seriously distortedthe market andcontributed to airlines’financial troubles

‘Amid the pervasivegloom, a few signs arepointing to bettertimes returning soonerrather than later’

ContributorsJames LamontSouth Asia Bureau Chief

James CrabtreeMumbai Bureau Chief

James Fontanella­KhanNew Delhi Correspondent

Kanupriya KapoorActing India Editor, FT.Com

Amy KazminNew Delhi Correspondent

Neil MunshiMumbai Reporter

Andrew BaxterCommissioning EditorSteven BirdDesignerAndy MearsPicture Editor

For advertising details, contactJohn McClure on (0) 65 62369508, john.mcclure@ft.com

Money worries: the rupee fell to record lows against the dollar at the end of last year, causing anxiety for the central bank Getty

FINANCIAL TIMES THURSDAY JANUARY 26 2012 ★ 3

India & Globalisation

The students milling aboutin a leafy, outdoor cafeteriaat the Indian Institute ofTechnology-Bombay bearwith remarkable noncha-lance the burden of beingthe face of the country’sdemographic dividend.

Part of the largest andfastest-growing segment ofIndia’s 1.2bn-strong popula-tion, these youths seempoised, with degrees inhand, to restore the countryto its double-digit growthdreams.

But beneath a façade ofteenage jostling and trendygadgetry is an acute aware-ness of the relentless scram-ble they faced from millionsof peers clamouring to getplaces at the right universi-ties, which are in severelyshort supply.

In a country where only15 per cent make it to col-lege, good quality highereducation is a luxury

reserved for the brilliantand affluent. Many top uni-versities are funded by thegovernment, but observerssay India has only recentlybegun to focus on address-ing this shortage by includ-ing it in its policy frame-work and inviting foreigninvestment.

Though the governmenthas generally targeted theimprovement of higher edu-cation in the past decade,the issue has become afocal point in the country’s12th five-year plan for eco-nomic development, a pol-icy framework due to beimplemented this year, saysan international develop-ment worker.

“There wasn’t as muchmoney or policy attention[paid] to higher educationin the past 10 years ... asthere is now,” the develop-ment worker says.

“A lot more is going tohappen. The upcoming 12thfive-year plan discussesresources and changes thatneed to take place ... toaddress the general expan-sion issue.”

Sheer numbers threatento overwhelm a creaky sys-tem that has failed to keepup with exponential popula-

tion growth. The country’sdecades-old network of 16prestigious technical insti-tutes, including IIT-B,admitted a mere 1.3 percent of 450,000 applicantslast year: the same net-work, along with a handfulof other top private andpublic universities, cater intotal to less than 5 per centof the country’s nearly300m people of college age.

The chance of getting into

such an institution is likelyto be lower than anywhereelse in the world, accordingto Ravi Sinha, professor ofcivil engineering and place-ment officer at IIT-B.

“Our entrance exam isextremely selective,” hesays. “It’s probably themost difficult in the worldin terms of how many can-didates apply and howmany we accept. Generallyin India, there’s a shortageof places in colleges ... and aperception that there is a

small number of good qual-ity institutions to beginwith.”

In spite of their covetedstanding, India’s best uni-versities have yet to beincluded in the league ofglobally-ranked institutionssuch as Cambridge or Princ-eton. IIT-B was the onlyIndian university to featurein Times Higher Educationmagazine’s 2011 list, thoughit was ranked in the 301-350category. Experts say thesize of the student popula-tion and limited interdisci-plinary research at topIndian institutions keepthem off global lists.

“The world’s best univer-sities typically have 10,000students, while Indian uni-versities are smaller,” thedevelopment worker says.“There isn’t enough inter-disciplinary work as IITsoffer [narrow] streams andcourses. They have toattract faculty from differ-ent disciplines and involvetheir students in moreresearch.”

At second-tier public uni-versities, a lack of account-ability and autonomyreduces incentive for qual-ity assurance, despite theneed for improvement.

Developed economiessuch as Canada see anopportunity in helpingIndia develop “knowledgeinfrastructure” to narrowthe gaps in quality of, andaccess to, higher education.

“There is room for [us] toparticipate in areaslike ... education, becauseIndia has a very significanteducation deficit,” saysEdward Fast, Canadianminister for trade. “It hasvery ambitious plans todouble the number of stu-dents attending tertiaryeducational institutions... and they’re going to needhelp.”

In spite of the strains onthe Indian education sys-tem, students appreciatethe opportunity to learn,hoping a degree will cata-pult them towards arespectable, productive job– thus kicking off a virtu-ous cycle that should even-tually benefit the country.

“Whether at the best uni-versities or not, we all facethe burden to get jobs andperform in the workplace,”says one IIT-B student.

“But we’re determinedto prove ourselves . . . andcontribute to the country’ssuccess.”

Students forced to play numbers gameHigher educationKanupriya Kapoorfinds places at topquality universitiesare in short supply

The entranceexam at IIT­Bis extremelyselective,says RaviSinha

Global supermarket chainshave long been salivating atthe prospect of enteringIndia’s buoyant retail sector.

With an underserved market of1.2bn people and worth about $450bn,and a rising middle class eager toaccess modern global products, Asia’sthird-largest economy is by far one ofthe most attractive retail markets inthe world, analysts say.

However, in November, when NewDelhi announced plans to throw theindustry open to the likes of Walmart,Carrefour and Tesco, the retail giantswere surprisingly reticent. In hind-sight, their caution made sense, as the

ruling Congress party was forced toshelve the landmark reform just twoweeks after it was announced.

The proposal to permit foreigngroups to own up to 51 per cent ofsupermarkets sparked protests andparalysed parliament, with opponentsarguing it would kill off the small,family-run shops that make up morethan 90 per cent of the sector.

The policy reversal disappointedboth domestic and foreign retailers.

Tesco branded the U-turn a “missedopportunity”. Meanwhile, Harsh Mari-wala, the head of Marico, one ofIndia’s largest consumer productscompanies, called the reversal a“highly regressive move” – one thatdeeply disappointed a business com-munity eager for economic reforms.

Rajiv Kumar, of the Federation ofIndian Chambers of Commerce andIndustry, one of the leading businessbodies, says opponents of the reformhad irresponsibly whipped up xeno-phobic sentiments about the return ofthe East India Company of colonial

days to set back a debate about mod-ernising a key sector.

“This is not the India of the 1700sthat we are dealing with now,” hesays.

These complaints added pressure onthe government, which had alreadybeen criticised for doing too little toolate. India’s legislative machine hasbeen at a standstill after a series ofcorruption scandals paralysed deci-sion making.

To make up for the embarrassingU-turn, the government led by Man-mohan Singh, prime minister, agreedthis month to open up its retail sectorto allow 100 per cent foreign owner-ship of single brand stores in India.This was an attempt to reassure glo-bal investors that the ruling Congressgovernment is committed to pushingthrough key reforms.

The move falls short of opening theretail sector to foreign supermarkets.But it will allow global brands such asIkea, Adidas, and Marks and Spencer,which were already allowed to own up

to 51 per cent of a store, to operate inIndia without a domestic partner.

Global single-brand retailers areexpected to take advantage of thereform, analysts say. The decision “islikely to result in more foreign compa-nies entering the market or expandingtheir presence,” says Fitch, the creditagency.

The move was also welcomed byexisting Indian retailers, as they seethe decision to remove restrictions insingle-brand retail as an importantstep towards further reforms in themulti-brand sector, as supermarketsare described in India.

“This is a welcome move with aclear potential to lift the generalmood in the economy,” says RajanBharti Mittal, vice-chairman and man-aging director of Bharti Enterprises,one of the country’s largest retailers.“We hope the initiative is a precursorto further liberalisation in the sectorin the days to come.”

However, even in this case retailershave shown some reservations overwhether they plan to enter India orboost their stakes in their existingjoint ventures. Many still fear the riskof a policy reversal or protests oncethey set up on the ground.

Ikea, the Swedish furniture retailer,which does not have operations inIndia, has repeatedly said it would bekeen to open stores across the coun-try. But it is not expected to make amove any time soon.

M&S, one of the UK’s leading retail-ers in India, says it will continue towork with its partner there, as itargues that it is useful to have a part-ner that understands the market

when operating in a country such asIndia.

The reticence towards going solounderlines the challenges retailersface when expanding in India. Operat-ing there is plagued with risks – theWorld Bank ranks it 132nd out of 183countries for ease of doing business.

The risks are not exclusively linkedto the government’s feeble decision-making process. Other common prob-lems include buying affordable landor commercial real estate for stores aswell as understanding India’s uniqueconsumer habits.

“India is a very heterogeneous mar-ket and any retailer planning to besuccessful here would have to tailorits products to the many differenttastes present. The customer in Delhiis very different from one in Chennai[Madras],” says Arvind Singhal, chair-man of Technopak, an Indian retailconsultancy.

No matter what happens, the evolu-tion of India’s retail sector will taketime, say analysts.

Problems in store for ambitious incomersRetailingJames Fontanella­Khanon the outlook for foreigngroups after the shelvingof a landmark reform

Operating in India isplagued with risks – theWorld Bank ranks it 132ndout of 183 countries forease of doing business

It is a common complaint ofparents in India: the tinymom-and-pop shops thatdominate the country’sretail landscape cannot berelied on to have the nap-pies brand you want in therequired size at the timeyou need them.

But rather than searchone grubby hole-in-the-wallstore after another to find adusty pack of nappies,many Indian parents arenow turning to a clutch ofnew, online baby goodswebsites that offer moremodern, hassle-free shop-ping experiences and abroad selection of products.

These baby goods sites –Firstcry.com, Babyoye.comand Hoopos.com – peddleeverything from essentialdaily supplies such as nap-pies, baby oil and wipes tomore elaborate items suchas toys, children’s book andfurniture. They deliver tothe home, and, recognisingIndian customers’ reluc-tance to use credit cardsonline and the cards’ lowpenetration rate anyway,they mostly accept cash ondelivery.

These websites are har-bingers of what manyexpect to be a fast-growingbusiness in India: internetretailing, propelled by thesheer hassle of trying tofind what you want inIndia’s stunted bricks-and-mortar retail industry.

“Retail establishmentsare the physical linkbetween products and cus-tomers, but in India, speci-ality retail channels are notevolved, so it is a challengefor the consumer and man-ufacturer to discover eachother,” says Neelesh Hun-dakari, a principal at con-

sultancy AT Kearney. “Theinternet is a medium thatmediates that.”

India may seem an oddcandidate for an internetretail boom. Its domesticinternet penetration rate isless than 10 per cent, withless than 121m of its 1.2bnpeople online. And manyIndians access the net fromcybercafes, rather thantheir own personal devices.

But India’s physical retailindustry is severely con-strained by strict limits onforeign direct investmentand a dire shortage ofaffordable commercial prop-erty for new shops in thebiggest cities. Consumers inincreasingly smaller citiesalso have few outlets wherethey can buy goods to fulfiltheir aspirations.

As a result, analystsbelieve the popularity ofpurchasing goods online is

likely to grow sharply.“Real estate prices and theamount of time required totravel in cities are both sohigh that it is forcing peo-ple to get online,” saysRaghav Gupta, a principalat consultancy Booz & Co.

Currently, Indians buy anestimated $600m worth ofmerchandise – includingbooks, clothing, baby sup-plies and other items –online. That is just a frac-tion of the $8bn they spendeach year on online travelpurchases, such as airlinetickets and hotel rooms.

But analysts and inves-tors say the market foronline merchandise couldbe worth $4bn to $7bnwithin the next five years,as internet penetration,through mobile phones andlow-cost tablets, deepens.

“Nobody knows exactlyhow fast it will grow, but

access to the internet ischanging so quickly, andinternet retail will defi-nitely be significant in thenext five years,” says MrGupta.

India’s best knowne-retailer – outside thetravel sector – is Flip-kart.com, which was set upin 2007 by two former Ama-zon employees. Flipkartbegan mainly with booksand has now branched outto categories such as mobilephones and electronics.

Websites selling high-endclothing, and accessoriessuch as bags and watches –such as Myntra.com,99labels and Fashion-andYou.com – have alsoattracted consumer atten-tion, especially fromsmaller Indian towns,where foreign brands arenot easily available.

“If hinterland consumerswant to buy luxury prod-ucts like perfume or pursesor apparel, they have tophysically come to Mumbaiso many of them are order-ing on the net,” says MrHundekari.

Baby products are a fast-growing e-retail niche,while Mumbai-based Fresh-nDaily.com peddles freshvegetables and other gro-cery items to residents ofIndia’s business capital. AtSaffronart.com even cuttingedge contemporary Indianart is for sale.

The limitations of India’sbrick-and-mortar retail sec-tor still do not offer anyguarantee of success fore-retailers. While travelsites such as MakeMyTriphave done very well, inter-net retailers selling physi-cal products such asclothes, books and babygoods still face serious dis-tribution challenges.

Some companies – suchas Flipkart – have opted tobuild their own in-housedistribution networks,while others are relying oncourier companies.

Overall, e-commerce looksset to be an increasinglyimportant part of India’sretail landscape.

Web takes hassle outof bringing up babyOnline shoppingThe arrival of sitesselling nappies andtoys heralds aninternet revolution,says Amy Kazmin

‘Real estate pricesand the timerequired to travel incities . . . are forcingpeople to go online’

In October last year, Her-mès, the French haute cou-ture company, did some-thing audacious: monthsafter launching its flagshipIndian store in a fully-refur-bished heritage buildingnear Mumbai’s financialcentre, the companyannounced its arrival inIndia by selling saris for upto $8,200 to the country’supper crust.

The move shocked – eveninsulted – some localdesigners, miffed at the“Gallic gall” exhibited bythe fashion house, betterknown for year-long wait-ing lists for Birkin hand-bags and silk scarves wovenfrom the cocoons of mul-berry moths.

The obstacles to luxuryretail success in India aremyriad, including the poorquality and high price ofreal estate, the lack of infra-

structure in cities where itcan take hours to travel20km, and high duties andtaxes that make well-trav-elled Indians more likely tobuy foreign goods whenthey are abroad.

But global brands such asHermès are realising thatdespite such shortcomings,the Indian market will becrucial to their future suc-cess, and tend to planlonger term than smaller,local brands – accepting theobstacles, and tough eco-nomic years like 2011, aspar for the course.

To a certain extent, lux-ury retailers must simplyresolve themselves to a 20-year game in India as themarket matures – it isexpected to grow from$4.76bn in 2009 to $14.7bn by2015, according to a reportfrom the Confederation ofIndian Industry – both froma consumer and an infra-structural standpoint.

But they were handed abonus in January in theform of a government regu-lation that will allow for-eign single-brand retailersto invest 100 per cent in thecountry.

That means foreign lux-

ury retailers such as Canali,Ferragamo and Louis Vuit-ton will be able to enterwith wholly-owned subsidi-aries, giving them morecontrol over their brands.

“Most of the largerbrands would prefer the 100per cent model becausethey have a very set strat-egy and they don’t wantanyone to tinker with it,”says Pinakiranjan Mishra,

head of retail and consumergoods for India at Ernst &Young, the professionalservices group. “This wouldmake it far more attractiveto them.”

For now, though, luxurybrands remain focused onChina, where there isgreater space, better infra-structure, less red tape anda luxury market thatdwarfs India’s, says Lax-man Narasimhan, head of

consumer and retail inIndia at consultancy McKin-sey.

“In India, the market isstill small, but it is grow-ing, even if we still have [alot of] barriers to address,including real estate availa-bility.”

With shopping malls dedi-cated solely to luxury suchas Delhi’s DLF Emporio,Mumbai’s Palladium, andBangalore’s UB City crop-ping up in major cities,retailers do have access tosome global-standard show-rooms – but prices remainhigh and space limited.

India’s lack of infrastruc-ture adds another impedi-ment. Though Palladium iscentrally located, in heavytraffic it can take 90 min-utes to travel the 12kmfrom South Mumbai, limit-ing the number of custom-ers and increasing the needfor more stores.

Those customers who domake it to the stores arelikely to find products atwildly inflated prices com-pared with what they mightcost in the west. India’simport tariffs range from 28to 208 per cent for luxurygoods, and consumers usu-

ally pay 40 to 60 per centmore than they would else-where in the world.

However audacious Her-mès may have been – itsselling of saris has beencompared with Indian vint-ners setting up shop in Bor-deaux – it did tackleanother of India’s signifi-cant obstacles: the companylocalised its products.

Over the past few years,some 60 global luxury fash-ion and accessories brandshave established them-selves in India, but fewhave done more thanimport an identical –though often more limited –selection of the lines theysell in the west.

Mr Mishra says localisa-tion is a crucial step towardcornering the Indian mar-ket. “You cannot take thesame products that work inEurope here in India andexpect to make scale,” hesays. “The clothes we wearare very cotton oriented, sothat’s one thing to look at;the second is the cut; themost critical part is the sim-ple things like havingbrighter colours than themuted colours you see in atypical European store.”

Big names look beyond obstaclesLuxury retailersThe global brandsknow India will becrucial for growth,writes Neil Munshi

‘The market is stillsmall but it isgrowing, even if westill have barriers toaddress [to face]’

Coals to Newcastle: a saleswoman arranges scarves inside a Hermès showroom in Mumbai, but the company has also been selling saris in India Reuters

4 ★ FINANCIAL TIMES THURSDAY JANUARY 26 2012

India & Globalisation

In the middle of a strike atMaruti Suzuki’s main fac-tory that would cost India’slargest carmaker $500m inlost production, the com-pany negotiated a deal toinvest $1bn in new facilitieson the subcontinent.

It was an unusual move,but – despite the troubles itand many other companieshave had in India – Marutiwas confident its new plantwould roll out on time andwithout any hitches, for onereason: it will be built inthe western state ofGujarat.

Ever since Tata Motorswas unceremoniouslyousted from the easternstate of West Bengal in 2008over a land dispute, andsuccessfully relocated toGujarat, the state – and itscontroversial chief minister,Narendra Modi – havebecome known for theirbusiness-friendly, anti-union environment andemerged as India’s answerto Detroit of the US.

“The main reason isbecause of the initiativesthat have been undertakenby the chief minister,” saysYaresh Kothari, auto ana-lyst for Angel Broking. “Hehas been very proactiveabout inviting industrialiststo the state and offeringthem quick access to land,which has become a majorproblem in the country.”

This year alone, Ford andPeugeot Citroen have joinedMaruti and Tata in makingmassive investments in thestate, drawn in by attrac-tive tax incentives,improved infrastructureand a streamlined landacquisition and approvalsprocess absent from manyother states in a countrythat seems to relish bureau-cratic red tape.

Last year saw growth inthe industry fall to an anae-mic 4.3 per cent on the backof high interest rates,Maruti’s production prob-lems and a general slow-down in the domestic econ-omy, after two consecutiveyears at around 30 per cent.

But India remains one ofthe world’s fastest growing,and most attractive, automarkets. Gujarat’s pro-business mentality makes itmore attractive still, remov-ing the uncertainty manyforeign, and domestic, com-panies face when enteringAsia’s third-largest econ-omy.

In 2008, Tata Motorslearnt first-hand howIndia’s fickle political windscan turn a done deal into adead deal when construc-tion of its plant in Sringur,West Bengal was halted byweeks of violent protestby local farmers.

The protests by thefarmers – who claimedthey had been forced togive up their land andhad not received suffi-cient compensation –were stoked by MamataBanerjee, then West Ben-gal’s opposition leader, andnow chief minister.

Tata shut down construc-

tion, though the plant –which was meant to pro-duce the low-cost Nano –was around 85 per centcomplete, and two yearslater announced the launchof its plant in the village ofSanand, Gujarat.

Part of the $500m invest-ment included a 375-acre“vendor park” for suppliers.The park promoted thegrowth of a supplier ecosys-tem, and Tata’s smoothacquisition of the land androllout of the plant gaveGujarat a reputation as aplace where carmakerscould do business worry-free.

And so last year foreigncompanies clamouring totap into an Indian marketwhose recent hiccups havelargely been understood asan anomaly followed suit.

In February Peugeotannounced an investmentof nearly $800m in Sanandas part of its aim of generat-ing 50 per cent of its salesoutside Europe by 2015,compared with 39 per centin 2010.

And Ford soon fol-lowed, announcingin July itsinvestment

of $1bn in a plant in Sanandthat should be in produc-tion by 2014, and will havean initial capacity of 240,000vehicles. This is more thandouble the capacity of theUS carmaker’s facility inthe southern city of Chen-nai, a popular destinationfor carmakers that has lostsome of its relevance amidGujarat’s rise.

At the time, Joe Hinrichs,Ford’s head of Asia-Pacificand Africa, said Gujaratwas selected over otherstates for its geographicallocation and ports fromwhich to export cars toother emerging markets.Ford ships the Figo fromIndia to 50 other countries,including South Africa,Mexico and the United ArabEmirates.

“Gujarat is well on itsway to become the automo-tive hub as every auto man-ufacturer is lookingtowards the state, thanks tothe pro-investment policiesand infrastructure,” says

Michael Boneham, presi-dent and managing directorof Ford India. “When Fordbegan to consider an addi-tional site to construct amanufacturing facility inIndia it was almost impossi-ble to ignore the impressivechanges and progressenacted by the state govern-ment and fast trackedapproval process.”

Gujarat’s port infrastruc-ture was also a big sellingpoint for Maruti when itannounced its $1bn plantinvestment in September –in 2008, it signed a $1.75bnjoint venture with thestate’s private Mundra portfor a “mega car terminal”to buoy the company’sexport plans.

Gujarat could be seen aspotentially politically sensi-tive as Mr Modi, the state’sHindu nationalist leaderand main architect of itseconomic revival since 2001,has been criticised for hislax role during the 2002communal riots when at

least 2,000 people – mainlyMuslims – were

killed. But fewauto executiveshave addressedthe issue, andit does notseem to havestopped thei n d u s t r yfrom accept-ing his invi-tations.

There islittle doubt

that more for-eign carmakers will be fol-lowing suit.

Global drive fuels Modi’s MotownCar industryGujarat has struckout on its own,writes Neil Munshi

Made in India: the Ford Figo is shippedto 50 other countries

Picture an Indian outsourcingcompany, and many still con-jure up open-plan call-centreswhere operators talk patiently

to distant customers about utility billsor flight tickets problems.

Such images infuriate executivesfrom the largest in India’s increas-ingly global software and outsourcingsector.

Their companies, they complainwith justification, long ago abandoneda business model whose successstemmed from the combination of alow-cost English speaking labourforce with smart technology.

Yet for India’s three most estab-lished, Infosys, Tata ConsultancyServices and Wipro, this mispercep-tion is the least of the problems theyface as they try to maintain their tra-ditionally impressive growth rates inthe aftermath of the global financialcrisis.

India’s biggest outsourcers remainfast-growing businesses. TCS, forinstance, the largest of the three, sawrevenues shoot up 24 per cent to$8.2bn in 2011 – a near fourfoldincrease since 2005.

But while revenue growth stillresembles the stellar performance of adecade ago, the companies, operationsare now starkly different.

Moving beyond the call centres hasmeant expansion into “value added”services, from bespoke software devel-opment to research, design and con-sultancy services, while also enteringareas such as cloud computing.

These activities increasingly replacethe more familiar business processand back office outsourcing opera-tions.

Today all three also earn the vastmajority of their income from clientsin advanced markets – as Infosysproved in its most recent quarterly

results, where it earned 64 per cent ofits revenue in the US, compared withjust 2 per cent in India.

This combination of more complexhigher-end offerings provided to bigglobal companies has also seen thecompanies shift more of their opera-tions abroad. While most of theirworkers still remain in India, they areincreasingly hiring elsewhere: TCStook on more than 1,000 workers inthe US last year.

Yet if these businesses are ever-

more technologically sophisticatedthey also face new pressures, oftenthe direct consequence of their ownsuccessful globalisation.

The first is a new vulnerability tothe economic weaknesses of Europeand the US, where so many of theirclients are based.

India’s outsourcers were hit in theaftermath of the 2008 financial crisis,as these clients cut their budgets(most obviously in the financial serv-ices industry) and this fed through

quickly to their own bottom line.BG Srinivas, head of European oper-

ations at Infosys, says the sector haslearnt from these lessons, and is wellplaced to avoid the same outcome asit copes with the effects of the euro-zone crisis and ongoing weak growthin North America.

Nonetheless he notes that inEurope, where his company earnsmore than 20 per cent of its revenue,“market uncertainty is still continu-ing, and clients are cautious”. This in

turn leads clients to reduce spendingand delay projects – prompting Info-sys to cut its full-year revenue fore-cast for this financial year.

These difficulties in Europe stem inpart from a second success: movinginto new geographies. Infosys pushedinto Europe to lessen its reliance onits US business, yet it is precisely thismove that now makes it vulnerable.

Meanwhile more ambitiousattempts to win business in otheremerging markets such as China and

Mexico bring fresh management andcultural challenges, but as yet notmuch in the way of significantincome.

The final problem is one of newcompetition. Some of the old call-cen-tre business has moved to other coun-tries, with the Philippines on somemeasures now boasting more call-cen-tre employees than India.

Meanwhile there are other pres-sures at home as fast-growing Indianfirms such as Cognizant and HCLTechnologies strive to break into thetop tier. And as India’s giants haveraised their game, so they increas-ingly must fend off competition fromthe elite western consulting and soft-ware houses, such as IBM, Capgeminiand Accenture.

The result has seen the share pricesof the Indian three firms stay steadyat best over the past year, with cau-tion over future earnings counteract-ing the benefits they ought to havereceived from India’s falling rupee –which plunged by around 20 per centover the course of 2011.

Yet for all this the fundamentalsunderlying the sector’s future remainpromising. In 2006 the US economistAlan Blinder wrote a provocative arti-cle in the journal Foreign Affairs pre-dicting an unstoppable wave of newservice sector outsourcing from theadvanced to the developing world.

As once-protected jobs in the educa-tion, health, financial, legal, and eventhe public sectors headed overseas MrBlinder estimated somewhere between22 and 29 per cent (about 25m-30m) USjobs could end up offshore.

The projections panicked westernpoliticians, but they also partiallyunderpin the projections of Nasscom,an Indian trade organisation repre-senting outsourcers, that the globalindustry will grow to produce reve-nues of $225bn by 2020, more thantripling in size over the decade.

If something even approaching theshift predicted by Mr Blinder comes topass, it is a world in which India’soutsourcing giants should be wellplaced to take advantage. If they do,they will have left the old world ofcall centres far behind.

New aims are set but old image dies hardOutsourcingJames Crabtree charts theshift from call centres tovalue­added services

Moving up the value chain: the Infosys campus in Bangalore (above). Along with big rivals TCS and Wipro, Infosys is reducing its dependence on more familiar business process and back office outsourcing operations

Corporate profile Tata chief strikes cautious note as he prepares to hand over reinsAfter more than 10 years of headyinternational expansion Ratan Tata’smessage to his employees at the startof this year sounded a decidedlycautious note.

The company his ancestors began asa small cotton trading business morethan a century earlier had grownsharply over the previous decade toearn revenues of $83bn during 2011,more than half of which came outsideIndia.

In November he had also found timeto unveil the long­awaited choice of hissuccessor – and in appointing 43 yearold Cyrus Mistry he revealed a low­profile candidate who caught India’sbusiness establishment by surprise.

Overall the head of India’s mostrecognisable and global companyseemed content that his group hadweathered the worst of a tough year.

Even so his remarks made clear thatthe task facing Mr Mistry, who takesover later this year, will be far fromeasy – and raised questions aboutwhether the group’s period of boldgrowth overseas has now come, atleast temporarily, to a close.

Tata’s spate of internationalacquisitions began in 2000 with thepurchase of Britain’s Tetley tea. Itsheight came in the later part of thedecade, first in 2008 with a $13.1bndeal to pick up Anglo­Dutch steelmakerCorus, and then a year later with TataMotors’ purchase of the ailing Jaguar

Land Rover from Ford for $2.3bn.These moves followed a pattern, with

the group expanding existing businesslines through a major foreign takeover.But the two largest placed considerablestrain on the group’s finances,especially during the worst of the 2008financial crisis, and have since left Tatacarrying a sizeable debt pile.

The group’s steel and motor armsalso endured a difficult time during2011, although for different reasons.Tata Steel, Europe’s second biggeststeel producer and India’s largest, lostalmost half its stock market valueagainst the backdrop of tough tradingconditions amid the eurozone crisis.

Tata Motors also struggled duringthe year, although the reasons werealmost the reverse: it suffered lossesfrom its domestic operations, withnotably poor results from its low­costNano model, despite a relatively strongperformance from its UK acquisition.

Some of the group’s other 31 listedcompanies were also dragged down byIndia’s growing economic worries.

Tata was embroiled, too, in thenation’s sprawling 2G telecomscorruption scandals, although thecompany – which prides itself on itsethical reputation – strenuously deniesany wrongdoing.

Other businesses did better, notablyTata Consultancy Services, the IT andservices division that remains one ofthe most valuable companies on India’s

stock market. The business continuesto hire tens of thousands of new staffeach year, and contributed a healthyslice of the overall group’s improvedfull­year after­tax profits in 2011.

But it was the perils that have comewith his group’s new global status thatseemed to worry Mr Tata most, as hismessage warned that “the troubledtimes will probably continue” for theworld economy, and called on hiscompanies to “review and moderatetheir earlier future projections”.

Following his lead, senior executivesare cautious when asked if this is theright moment for Tata to continue –and deepen – its push abroad.

Ishaat Hussain, finance director atTata Sons, the group holding company,

says: “In 2012, companies in the TataGroup will continue to consolidate onthe acquisitions they have made in theprevious years. But, should anopportunity arise which is of strategicimportance to a company, we willconsider it.”

If the group does find money tospend, its recent purchases will also befirst in line. During 2011 KishorChaukar, managing director of TataIndustries, said that the wider groupalready had plans to invest more than$23bn over the coming five years.Considerable investment will certainlybe needed in the steel and car arms.

Looking across the groupJagannadham Thunuguntla, head ofresearch at SMC Global, a Delhi­basedbrokerage, says he does not expectthese investments to lead to a restartof the company’s buying spree:“Immediate major acquisitions areunlikely under the new leadership. MrMistry is know for his conservatism,and the chances are he will prefer tolook for organic growth.”

Mr Tata concluded what will be hisfinal such end­of­year report with whatcould be interpreted as a message tothe next generation: “We must not beso risk­averse that we lose out on theinteresting opportunities.” Mr Mistrywill take this to heart – just not quiteyet, perhaps.

James Crabtree

Cyrus Mistry: surprise appointment