Recognising India’s supply market potential

India is gradually becoming a more important global supply market in international supply chains, but procurement teams must successfully navigate the challenges to fully leverage the opportunity. Axis Group International offers insights for effective global procurement & supply from India

Key Highlights

India is the 6^th largest economy globally – and its growing competitiveness in an increasingly broad range of sectors position it as an attractive supply base; to illustrate, India’s exports surpassed USD400bn for the first time in their financial year from April 2021 to March 2022 – a significant milestone
India is positioned with other major dynamic markets to shift the global exporter rankings away from the traditional export leaders. (More on this: A World of Global Procurement Opportunities – but Where to Look?)
Proactive procurement teams from around the world and across industries are already increasing the integration of India in their international inbound supply chains
However, an India sourcing strategy must appreciate the nuances in the market – there are many challenges and pitfalls that must be overcome
On-the-ground support with an experiential understanding of the market is critical in effective supplier selection – and for successful navigation of the many cultural complexities
An appreciation of the range and depth of diversity in India is important during supplier engagement. Showing genuine intent and being prepared for uncertainties are key ingredients of the process
Supplier performance and procurement process management requires agility – from ensuring successful execution of supply contracts to navigating the intricacies of quality management, expediting and logistics coordination

Global trade has rebounded in 2021, with key global sourcing markets competing for their share in tentatively rising global demand. Whilst India has faced severe challenges from the pandemic, its long-term growth trajectory and potential are undeniable and make it a key supply market to focus on. Many economies experienced economic growth in 2021, with India maintaining its place as the 6^th largest economy in global GDP rankings, climbing up from 14^th in 1995.

As such, India is already a major supply market. To understand this, we must appreciate the broader economic context. India is currently the world’s sixth largest economy, with a GDP of USD 3.04tn in 2021, and is potentially poised to become the third largest by 2025-30. India was a closed economy until 1991, when trade liberalisation was introduced. Some sectors are fully open to foreign participation i.e., 100% foreign direct investment (FDI), while some sectors have partial FDI limits. A few sectors such as real estate construction and tobacco are still fully restricted. As a market that is home to 1.39 billion people and with continued momentum towards growth, it is clear why many are optimistic about the future in India. However, on-the-ground realities are highly nuanced and failures among many foreign entrants is a stark reminder that there are real challenges to navigate.

An increasingly attractive and comprehensive supply base

India is not just an attractive market to sell to; it is also a supplier to the world. Historically, India was known for spices, precious stones and jewellery, and cotton, among other commodities, and has been an integral part of various historic sea and land trade routes. In recent years, India has become synonymous with IT software exports, back-office support, and generic pharmaceuticals. However, India is also a major source for a variety of other sub-categories of goods including textiles, gifts and handicrafts, decorative items, leather goods, sports goods, petroleum products, machinery and equipment, tea, coffee, tobacco, seafoods and meat as well as chemicals, iron, and steel. The list goes on.

From 2001-2021, India’s manufacturing capacity expanded, with India’s exports growing at a CAGR of 19%. Metals & minerals, chemicals & plastics, and machinery & electronics saw double-digit growth in this period. Traditionally, Indian exports targeted its neighbours in South Asia and the Middle East, with the US, UK, the Netherlands, and Germany placing in the top 10 export destinations as well.

Trends: India’s top export partners are spread around the world, with the US receiving 18% of its total exports in 2021.

India has climbed to 17^th rank in global exports in 2021, compared to 21^st rank in 2020
Its exports hit USD 395bn in 2021, a year-on-year (Y-o-Y) growth of around 43%
India’s exports reached a significant milestone by March 2022, exceeding USD400bn for the first time in the country’s financial year period of 1 April to 31 March. India exported USD 418bn over this period. This places India in reach to overtake mature exporters such as i.e., UK, Canada, and France over the next 5 years in the top 20 rankings
Although the largest segment in exports in 2021 were metals & minerals, its exports of fuels has experienced the highest growth rate in the past two decades, growing at a CAGR of 17.8% during the period of 2001-2021
Top goods exported in 2021 were refined petroleum (USD 54bn), diamonds (USD 25bn), and packaged medicaments (USD 17bn)
Export of engineering goods showcased a strong 32.04% y-o-y growth and is expected to be a key export category for markets such as the US and Middle East
In 2019, consumer and intermediate goods together constituted around 76% of the total exports
Owing to the pandemic, India’s production and share of chemicals & plastics in total exports grew, as the sale of medicines, vaccines, PPEs, and cleaning products surged across the globe. Indian pharma industry played a pivotal role in the fight against the Covid-19 pandemic, demonstrating to the world that it is a reliable partner when it comes to dealing with a global health crisis
India’s trade deficit had been falling since 2018, but it again increased to a deficit of USD 175.6bn in 2021 from a deficit of USD 92.5bn in 2020, mainly due to growth in imports of crude oil, coal, gold, electronics, and chemicals as the economy reopened and business and consumption activities stabilized. The rise in commodity prices, including crude oil and coal also played a significant role in adding to the deficit in 2021
67% of India’s population belongs to the age group of 15-64 years, a growing market of consumers in a growing economy – making it a potential powerhouse for manufacturing in the future

Upshot: Like rest of the world, the Indian economy was severely impacted by COVID-19 but was quick to recover in 2021 and is maintaining that recovery in 2022, as demonstrated by various economic indicators, such as the Producer’s Manufacturing Index (PMI), showing production returning to its pre-Covid levels (Mar 2022: 54.09% and Apr 2022: 54.7%). India’s merchandise export growth was largely driven by a surge in demand for products like petroleum, cotton yarn, textiles, chemicals, and engineering goods.

India is gradually emerging as another viable alternate in Best Cost Country (BCC) sourcing, thanks to the government’s initiative of ‘Make in India’ to encourage home-grown businesses and spur domestic manufacturing, as well as the changing geo-political landscape
The central government and various state governments created schemes to attract foreign investment like ‘Atmanirbhar Bharat – a self-reliant India’, and invested in the setting up of Special Economic Zones and a more favourable FDI regime
To boost the entry of foreign firms, investments to build infrastructure have increased and bureaucratic paperwork have reduced
In addition, foreign investment and the shifting of manufacturing bases of major foreign companies gave a positive thrust to the economy
India’s bilateral trade deals with countries around the globe, as well as its membership in several multilateral forums, have enabled it to maintain good trade relations with several countries despite political disruptions. Recently, India concluded a Comprehensive Economic Partnership Agreement (CEPA) with the UAE, which aims for bilateral trade to reach USD 100bn within the next five years from the current USD 60bn
Due to sufficient domestic demand as well as complex export requirements, Indian businesses were not motivated to export earlier. However, the outlook towards trade is increasingly changing as Indian businesses are led by risk-taking and forward-thinking second generations with an exposure to and understanding of the international environment

Imperatives: India’s economy recovered in 2021 as the country was able to tap on to the opportunity of being a reliable supplier when global demand from its biggest markets rose, leading its exports to rebound to pre-pandemic levels. The long-term potential has also not changed, and India will increasingly be a more prominent supplier in global value chains. Hence, procurement & supply teams must consider India’s role in their international supply chains:

Take note of India. It is becoming a more competitive supply base with a gradually developing integrated supply chain infrastructure
India is a key market to explore for companies that are underexposed to the country but potentially overexposed to other markets such as China, for example
Invest in strategic intelligence and understand India’s supply market status and capacity to satisfy your procurement needs – whether in high-value, or low-value products – relative to incumbent source markets
Incorporate India into supply base diversification considerations. Adopt a long-term view here – some challenges will persist but the pay-off is worth the effort
Seek out strong India-capable partners to develop an India-inclusive procurement strategy

Challenging, but possible

However, to tap into Indian suppliers is not always easy. Global sourcing is an evolving subject with standard methodologies and recommended best practices. Axis Group applies robust, tried, and tested methodologies to its global sourcing interventions and is trusted by clients globally, including some of the world’s largest companies with complex procurement needs. Our experience suggests that while the standard methodologies and recommended best practices form a sound foundation, the uniqueness of India demands an in-depth understanding of the local context. We frame a number of ‘top-tips’ that could support successful and effective global procurement and supply from India. We categorised these tips under the three phases of a typical global sourcing life cycle. (See Axis Group Standard Procurement & Supply Methodology below.)

Global Procurement & Supply – Simplified Standard Methodology

Source: Axis Group International

Phase 1: Supplier Analysis

Select the right supplier – easier said than done!
Thorough supplier identification, evaluation, and selection is a core requirement for success. Finding the right supplier is perhaps the first of many hurdles towards successful sourcing from India. In many sectors, sources of up-to-date information are scarce or non-existent. Consolidated, current, and reliable supplier lists simply do not exist. Many suppliers, including the larger ones, may not have a decent, functional website. Often, contact details are out of date and reaching the right person can be difficult. Hence, it is far more challenging to assess basic but vital information from suppliers such as their scale of operations, production capacity, overall capabilities, market reputation, reliability, background, customer base, and so on. Accessing this information at speed across industries, regions, and categories without on-the-ground resources and knowledge is often impossible. Physical supplier visits help – but distances and underdeveloped infrastructure could mean this becomes a 3 to 4-day affair, which may not be feasible. That again translates into the need for a locally present partner with a pre-qualified supplier base and resources to quickly navigate (identify, evaluate, and select) new, unlisted suppliers. This can greatly reduce time, effort, cost, and risk.
Assess true export readiness – also willingness, experience, and international capability of the suppliers
India has huge domestic demand and the process of exporting from India is not as smooth as in developed countries. Hence, many Indian suppliers are not enthusiastic about exporting, especially to newer markets that are traditionally not key trading partners. Many smaller suppliers in India are willing to export but may not have sufficient experience and bandwidth to manage a complex export process from India.
Appreciate social, cultural, and demographic positioning of supplier and key management team
India is a diverse country geographically, demographically, and culturally; India is called a ‘sub-continent’ for valid reasons. This leads to many disparities in the way of life, motivations, business culture, and environment based on where you find yourself in India. It is very crucial to understand the country and the local context of suppliers comprehensively, and to adapt strategy and make decisions accordingly. Some suppliers, one may find, are ostentatious, outspoken, and confident and some are very humble, modest, and reserved. The result is that statements as simple as ‘yes’ or ‘probably’ or ‘maybe’ can take on very different meanings across these groups. Additionally, Indians often avoid the singular ‘I’ and a direct ‘No’. Interpreting the subtexts and unique indirect modes of communication require experiential understanding. Another consideration is around time. In large metro cities, commuting to the office takes longer and as such, offices generally start later than their international counterparts. Knowing this and planning around these kinds of small but important differences will bridge expectations and reduce frustrations.
Align expectations, perceptions, and deal with non-conformity
Perceptions of quality, the level of appropriate customer service, concepts of time, and timelines can vary both within India and in relation to other countries. To mitigate risk, it is important to broadly define scope with suppliers and leave some flexibility in detail and execution.

Phase 2: Supplier Engagement

Show seriousness and mutual respect to build a lasting relationship
Most sectors in India have a large domestic demand and only a handful of sectors are export oriented. This means that while buyers are selecting their suppliers, suppliers are also selecting their customers. Suppliers invest time and effort only on business prospects they perceive to be serious. Hence, it is very important to be well prepared before engaging with potential Indian suppliers. Clarity about requirement and specifications will set the tone of further engagements. A half-baked, incomplete specification is likely to be rejected unless the aim is to develop the product jointly. Show a genuine eagerness to forge a mutually beneficial relationship.
Adapt your approach and be ready for the paradox: one size does not fit all, neither ‘proven’ strategy or ‘standard’ methodology from other markets will necessarily work
A willingness to be flexible, an attitude of collaboration, and a win-win approach is crucial to forging a long-term relationship with Indian suppliers.
India is not a homogenous market: Social, cultural, language, and demographic diversities are an ever-present reality
The depth and magnitude of the diversity in the country becomes clear during supplier engagement. There are subtle and stark differences and navigating through these require refined skills. There is quick ‘dummy’s guides’ to the culture, but these are not fully reliable. Many locals themselves have not grasped the scale of diversity, thus a ‘going native’ approach may backfire. Relying on the more natural appreciation of the differences that local experts have is important.
Be ready to be flexible: nothing is cast in stone
Uncertainties, be it traffic congestion or an unreliable telecom network are part of Indian life, so spontaneity is valuable. Many Indian people view the ability to improvise as the hallmark of intelligence. However, this ad-hoc approach may unnerve those who are new to this market as they interpret it as a lack of planning. This is often flagged as a key risk while dealing with Indian suppliers. It is therefore not unwise to afford a supplier a degree of flexibility once they have satisfied key selection criteria.

Phase 3: Supplier Process Management

Realise post purchase value with a collective and collaborative approach
Many Indian suppliers are not rigorous during contracting. More emphasis is placed on mutual trust and personal relationships than a formal written contract. For this reason, it is important to continuously engage with the supplier during the production, testing, packaging, and shipping phases. Negotiation is preferred over legal means to resolve conflict. The Indian legal system and its ability to enforce rulings are a major challenge, further incentivising a collaborative and collective approach that suits both parties.
Supplier relationship management – what is so unique about it?
Many businesses in India still run on trust and relationships. Commitments must be honoured irrespective of commercial viability. India is also a large country – where you choose your base in India is key. Identify key supplier clusters and set up near them. Managing a supplier relationship in India means understanding hierarchy and power, not just the organogram. Professional relationships are expected to go beyond the office. It is not uncommon for a supplier to invite clients for a personal visit to their home.
Festivals and holidays…plenty of those
Festivals in India have a broader significance and deep ramifications for business. Deals are not done during certain periods for some religions, communities, or regions. Festivals are not uniform in India; it varies based on region and religion. For example, eastern India might be completely closed for a week during the Durga Puja, while business continues as usual in other parts of the country. Being aware of these events is important for planning.
Patience, patience, and more patience
Finally, the pace of work in India can be blistering or extremely slow as Indian people often prioritise certain things over business. For example, a deal may be delayed due to an Indian supplier looking for an auspicious moment to sign the contract or simply being away on holiday. Often, sudden occurrences in India are beyond a supplier’s control, such as strikes or roadblocks. Therefore, patience is important, sometimes a lot of it, especially while dealing with bureaucratic systems. Agility in responding to both the fast and slow pace of business in India at the same time will not only produce better results but also minimize frustrations.

Final Word

It is not easy to understand the complexities of a diverse Indian supplier base and to navigate this large supply market successfully. For those who are unfamiliar with the market, this is even harder. Even more so in a post-Covid environment. But the potential prize for getting India sourcing right is very large and it must therefore be in focus. A staged approach may be prudent but, for many companies across industries, India cannot be ignored. Axis Group has been developing an on-the-ground presence and gaining experience in India’s key industrial clusters for many years. With a diverse team, local knowledge, and several different language capabilities, we can help you realise your Indian sourcing objectives.

For more on Axis Group International’s Global Procurement & Supply solutions email us at solve@axisgroup-international.com

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