Competing with India: the free market strategy

How Pakistan can identify itself as an attractive destination.

It is the question that every Pakistani hates answering when posed by a foreign investor: “Why should I not invest in India instead?” Yet this need not be an uncomfortable moment, for there is an answer that is likely to be music to the ears of an international investor: “Because our market is freer than India’s.”

That India is a bigger, faster growing and thus far more attractive market is a fact that all local entrepreneurs should resign themselves to, if they have not done so already. But by no means does this mean that Pakistan is a less attractive market on every front. Of considerable assistance is the legacy of Indian protectionism that still makes its presence felt today.

Nearly two decades after it began the process of economic liberalisation, the pall of leftist policies still hangs like a cloud over many of India’s key economic sectors. The preamble to India’s constitution still describes the republic as being ‘socialist’ – a word that is anathema to most global investors (and many Indian citizens as well). While much of the legacy of Nehruvian economics is being dismantled, several sectors of the economy remain frustratingly beyond the reach of foreign investors behind protectionist walls. The Indian government may have good reasons for keeping them thus, but it is a situation that can be exploited by Pakistani entrepreneurs and government officials.

Of particular importance are three highly lucrative ones that have high walls of regulation in India, but are free and open for investment in Pakistan: retailing, banking and real estate.

Retailing

The Indian retail market is massive, growing in leaps and bounds, and offers the most direct access to disposable incomes of the much vaunted Indian middle class. Yet there is a slight tangle: foreign investors may not open large retail chains, at least not without an Indian partner. If they open standalone retail stores, they cannot exceed a size that would be too small for most supermarkets.

Several foreign investors have tried different ways to get around this problem. Wal-Mart, the world’s largest retailer by almost any measure, has set up wholesale operations in India while establishing its supply chain in the hopes of eventual deregulation by the Indian government. Other foreign retailers have chosen to partner with Indian firms.

While Pakistan’s market is smaller by a factor of six, it is completely open to foreign investment at both the retail and wholesale levels. Foreign investors such as Germany’s Metro Cash & Carry and France’s Carrefour have already invested in establishing wholesale outlets in Pakistan. None, however, have thus far ventured into retailing.

Pakistan, in some respects, is also an easier market to operate in – given the fact that an estimated 55 per cent of the population now lives in areas that can be classified as urban, as opposed to other South Asian markets that are still overwhelmingly rural. Urban areas have higher concentrations of people and are thus more profitable for retailers, who depend on high foot traffic.

Banking

The Indian banking sector is theoretically open to foreign investment and indeed foreign banks have been operating in Indian since the 1850s. Yet, according to the Indian financial daily Mint, their market share has remained stagnant at 6.5 per cent for over a decade now. This is in large part due to the glacial speed at which the Reserve Bank of India approves licences to set up new branches for foreign-owned financial institutions.

And while foreign banks often lead the rankings in terms of mergers and acquisitions advisory, they are not allowed to buy more than 15 per cent of a local bank without RBI approval. In effect, the Indian central bank restricts growth, both organic and acquisition-based.

The State Bank of Pakistan, on the other hand, has no such compulsions. Of the eight largest banks in Pakistan, four are majority-owned by foreign investors. The London-based Standard Chartered Bank was able to acquire Union Bank in 2005 without any major regulatory hurdles, vaulting to become the eighth largest bank in the country by assets.

Real estate

Indian real estate has attracted considerable investment from the United States and Europe and is rightly seen as a major opportunity by most global financial institutions. Yet here again, regulations are often too restrictive to allow profitable investment in certain subsectors.

For instance, many major cities have rent-control laws that have a tendency to let some of the most valuable real estate be unavailable for investment. In the case of Mumbai, tenants cannot be evicted and the limits on raising rent are so draconian that it is more or less impossible to do so in many areas, particularly in the southern part of the city, which is also the commercial hub.

In Pakistan, by contrast, regulations are relatively straightforward. No part of any city is closed to real estate investment from anywhere. And as for rent, owners and developers can charge whatever they please. The most restrictive regulation in most Pakistani cities is the need for an environmental impact study.

Pay the Communists

In short, Pakistan is a far freer market than India’s and is thus a more inviting place to invest on the regulatory front. While the Indian market is larger, Pakistan can offer useful insights to any corporation looking to establish a significant foothold in South Asia.

So while Pakistanis may quietly groan at the inevitable “India question”, they can at least try to play up what is genuinely the country’s relative strength. India will eventually open up, but until then, we can take advantage of being the freer economy. And the more mischievously inclined businessmen may even want to try donating to the Communist Party of India.

The writer is a financial and management consultant based in Karachi and can be contacted at [e-mail]

Published in The Express Tribune, December 20^th, 2010.