India is on track to become the third largest consumer market in the world by 2027, thanks to a rise in the number of middle to high-income households.
Continued urbanization and digitalization of the economy are expected to help boost consumer spending and give brands easier access to consumers through both physical and online channels. Overall, household spending is projected to rise to $3 trillion, with a quarter of households expected to have $10,000 in annual disposable income, according to a recent report by BMI.
With the bulk of the affluent households located in major metropolitan cities, such as Bengaluru, Mumbai, and New Delhi, tech and fashion brands ranging from Apple and Samsung to Valentino and Balenciaga are busy setting up shop and building brand loyalty. Meanwhile, investors such as the Blackstone Group and APG Management are pumping money into the country’s fast-growing mall industry, which is set to account for $39 billion in retail sales by 2028.
While India presents a prime opportunity, the on-the-ground reality of establishing business and driving revenue has been a sobering experience for many international companies.
The government of India revealed last year that as many as 2,783 international companies have ceased operations in the country between 2014 and 2021. The latest retail player to make an exit was Germany-based Metro Cash & Carry, which decided to sell its business to Reliance Retail Venture after a largely unsuccessful 19-year-long run.
For many of these businesses, efforts to succeed in the Indian market are often mired by several factors:
India’s foreign direct investment paradox
The Indian government has been actively encouraging international businesses to make investments in the country. At the same time, it is putting pressure on global companies to manufacture their products in India as part of its “self-reliance push.”
“U.S. exporters are being pressured to start manufacturing their products locally to retain market access, particularly if similar goods are not already produced in India,” the U.S. International Trade Association (ITA) said in its market overview report last year. “As part of its self-reliance movement, India has introduced market access barriers in the form of tariffs, localization requirements, indigenous standards requirements, and labeling practices, price controls, and import restrictions.”
The not-so-quick sprint from red tape to red carpet
Virtually addressing the G20 Trade and Investment ministerial meeting last month, Prime Minister Narendra Modi remarked that India has gone from “red tape” to “red carpet” to allow unfettered foreign investment in the country. While there is no denying that the Modi government has been laying the framework to make it easier for international brands to invest in India, several key challenges remain. The country continues to be infamous for its bureaucracy and red tape, which makes compliance an uphill task for most businesses.
Sky-high import tariffs
India today has one of the highest import taxes in the world, with most goods and services subjected to an average rate of 18%. Import tariffs are even higher for specific categories, such as automobiles, coming in at 70% for cars costing under $40,000.
Another critical problem lies in the fact that the Indian government has continued to raise tariffs and non-tariff barriers across most sectors to protect domestic supplies and support indigenous production.
Complex compliance and licensing requirements
Power and decision-making as it pertains to governance, regulation, taxation, and labor relations are largely decentralized in the country, with states holding greater power than their U.S. counterparts, according to the ITA. Meaning businesses face varying operating conditions across state lines and must satisfy several stakeholders.
Few players hold too much power
The Indian retail sector is today controlled mainly by a select few tycoons, including Mukesh Ambani, the 12th richest person in the world and the founder of Reliance Retail. Ambani’s retail business operates over 18,000 stores in the country and has played an instrumental role in helping international brands like Balenciaga and Valentino enter the Indian market.
For global brands, entering the Indian market often entails navigating the complex regulatory landscape and locking horns with domestic players with significant political sway.
Navigating these complex market dynamics and compliance challenges requires retail brands to engage in long-term planning — one that takes a state-by-state approach to navigating various complexities and coming up with innovative solutions. Take it from global brands such as Zara and H&M, which are both registering strong growth.
In its most recent earnings report, Zara reported a 40% increase in revenue for the financial year 2023, while its profit margins rose by nearly 78%. H&M India, on the other hand, reported a 49% increase in revenue. Both Zara and H&M have seen growth in revenue as they have expanded their business across the market while still keeping their focus on offering an omnichannel experience that meets the preferences of the country’s digitally savvy, young population.