Select Committee on Trade and Industry Third Report

1  Introduction

1. How the UK should react to globalisation is one of the most important issues facing the UK Government. To know how to react, it is necessary first to understand the real nature of the challenge. We undertook this detailed examination of trade and investment relations with India to learn about the specific issues in this vital trading relationship and to inform our wider work on the actions the UK must take to remain competitive.

2. Our decision to begin the new Parliament with an inquiry into India was born of an often-expressed concern that the UK is making less of its opportunities than our global competitors in the US, Europe and the Far East. We had heard representatives of both the Indian Government and the private sector express concern that our unique relationship with India should be generating a much higher level of trade and investment than was actually the case. Currently, it was said, we were losing ground relative to those competitors.

3. The purpose of our inquiry was to establish the facts about the opportunities and threats from India, and to explore what more could be done to increase commercial activity between our two countries to our mutual advantage.

4. Awareness of the developments in the Indian economy has grown sharply in recent months. During our inquiry, and particularly since the Davos conference at the beginning of 2006, levels of interest in India globally have clearly been growing. Our report found, however, that the UK's understanding of what is happening in India is still only partial.

5. We were told during our visit to India that the country still faces many challenges—growing income inequalities, serious environmental issues and poor infrastructure were the three issues most often highlighted to us as causes for concern. Concern about the first of these has recently led to the very controversial decision by the Indian government to reserve a high proportion of university places for lower castes.

6. We also saw for ourselves the huge self-confidence of the business community, the growth of the Indian middle class as major consumers, the underlying strength of the rule of law and democracy and the commitment of the Indian Government to the continued liberalisation of India's markets.

7. We were concerned that the UK's perception of India has been seriously distorted by the media's focus on the perceived threat to UK jobs from outsourcing, particularly from call centres, creating a view that these centres are the dominant feature of the Indian economy. While we were in India, we saw that the true scale of business process outsourcing (BPO) goes far beyond call centres and there is a sophistication and range of services offered under this beguilingly bland generic title. We also saw the growth of manufacturing industry of considerable quality in both the automotive and aerospace sectors.

8. There are three themes that flow through this Report and which should be regarded as our principal conclusions on which our more detailed recommendations are based.

9. First, that the UK is not as engaged with India's markets as it should be. Despite our long history of commerce with India, UK companies are overall falling behind their major competitors, perhaps because too many UK companies tend to see India simply as a source of low-cost labour, overlooking that it is an emerging market in its own right. The UK Government, business, and indeed the higher education sector, all need to be far more entrepreneurial in their approach to India if they are to take advantage of the huge opportunities this vast country has to offer our companies and institutions.

10. Second, the Indian market is liberalising at a rate not always fully appreciated in the UK. Constant vigilance is needed by those wanting to do business with India, if the fullest advantage is to be secured by them from this progressive liberalisation. However, uniform and continuing progress cannot be assumed and UK diplomacy must continue to urge the Indian authorities to continue on their chosen course—and to demonstrate by example in world trade talks our own country's recognition of the merits of liberalisation.

11. Third, that the UK's institutional arrangements to support trade with and investment both in and from India are characterised by enthusiasm but also by confusion. A great deal of good work is being done, but by too many overlapping bodies with ill-defined responsibilities, and often inadequate resources. Viewed from India, the UK is a small country, and we need to be far more focussed to have a real impact.

12. India's economy is diverse in the extreme, encompassing as it does: subsistence farming and modern agriculture (accounting for around 21% of gross domestic product (GDP) and 60% of total employment); rural handicrafts and a range of modern industries (accounting for around 28% of GDP and 17% of employment); and many services (accounting for around 51% of GDP and 23% of employment).[1]

13. Following independence in 1947, India's economy was highly centralised and largely closed to outside trade, with economic policies based on import substitution[2] and state ownership of 'key' industries.[3] India was characterised as a country of minimal import, export and investment potential by western companies and pre-1990, real GDP growth was averaging just over four percent per annum.[4] From the middle of the 1990s, India's government embarked on a series of market reforms including a relaxation of the restrictions on foreign ownership of Indian companies in some sectors and the privatisation of state-owned industries. The reforms gave an immediate boost to the economy and real GDP growth averaged seven percent between 1994 and 1999.[5] More recently, India's economy has been growing at a trend rate of just over six percent per annum[6] as the present Indian Government has continued the process of economic reforms. Real GDP growth was 8.5 percent for the financial year ending March 2004,[7] 7.5 percent for the year ending March 2005, and 8.4 percent for the year ending March 2006.[8]

14. As the Indian economy continues to develop, it is 'migrating' up the value chain.[9] The Indian middle class, on even conservative estimates, is forecast to grow to around 200 million people in the next 15 years.[10] This will raise consumer demand as incomes rise, steadily increasing the market opportunities for UK companies to trade their products and services. We were concerned that UK companies were not taking sufficient advantage of the opportunities a fast developing India was providing and so decided to undertake an inquiry to ascertain why this was. The original terms of reference for our inquiry included looking at the difficulties and opportunities faced by UK companies, and the role of the Government in assisting UK companies wishing to trade, or forge investment links with India, including the responsibilities of UK Trade & Investment (UKTI).

15. During our inquiry we took formal evidence from: Tata Consultancy Services (TCS) and Diligenta; Aviva Offshore Services and Norwich Union; UKTI; the Indo-British Partnership Network (IBPN) (represented by Mr Karan F Bilimoria, CBE, DL, Chief Executive of Cobra Beer Ltd, and Chairman of the IBPN and Dr Shailendra Vyakarnam, Director of the Centre for Entrepreneurial Learning, University of Cambridge and Board Member of the IBPN); The India Group (represented by Mr Sonjoy Chatterjee, Managing Director and Chief Executive Officer of ICICI Bank (UK) Ltd and Chairman of The India Group, Mr Anwar Hasan, Managing Director of Tata UK, and Mr Sirjiwan Singh, Head of Wockhardt UK Limited); and Mr Ian Pearson MP, the then Minister for Trade.

16. We had meetings with Kamal Nath, India's Minister for Commerce and Industry and visited a call centre in Belfast, owned by Hindustan Computers Limited (HCL) a major Indian IT company. We also undertook a visit to India, where our attention was continually drawn to the opportunities presented for the UK higher education sector by the companies and organisations we met. We took formal evidence upon our return from representatives of higher education institutions (HEI) with an interest in India. These were Lord Patten of Barnes, Chancellor of Oxford University and Newcastle University, and Dr Tidu Maini, Pro Rector, Development & Corporate Affairs for Imperial College London. We also took evidence from the British Council, which has responsibilities for promoting the UK's education sector in India.

17. We received 28 written memoranda from other companies, trade associations and individuals, which are listed on page 65. We express our gratitude to those who provided evidence to the Committee and those who met and discussed issues with us during our visit to India.

1   CIA, Factbook, 2005 CIA website (14 June 2006): Back

2   The policy of protecting an indigenous industry against imported goods of a similar type. Back

3   Appendix 30, Annex A, para 2 Back

4   OECD website (14 June 2006): Back

5   Indian Ministry of Statistics and Programme Implementation (MOSPI), National Accounts Press Release: Statement S-1.2: Macro economic aggregates and population, available on the MOSPI website (14 June 2006): Back

6   OECD website (14 June 2006): Back

7   MOSPI website (14 June 2006): Back

8   Astaire Research, The India Report, 31 May 2006 Back

9   Q 372  Back

10   Appendix 1 Back

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Prepared 22 June 2006