Letter from... Delhi

Indians grew more cautious about their economy in 2011. Gone are dreams of rivalling China with double-digit GDP growth; rising interest rates and inflation have dashed those. There is fear that a slowing global economy will sap growth, for example, in India’s hugely successful outsourcing industry. And concerns over corruption and the slow pace of economic reforms have soured the mood.

But, for all that, India’s prospects are brighter than almost anywhere else. Despite a downward revision in late 2011, Morgan Stanley still predicts India’s GDP will grow by 6.9% in 2012. A young and massive population of 1.2 billion is surging. People are moving to towns so quickly that the country needs to build a city equivalent to the size of Chicago every year in which to accommodate the influx.

Even in villages, as multibillion-dollar welfare spending gets out to more remote areas, consumer spending power is soaring. The poorest once lacked the means to buy basic goods, such as toothpaste, soap or higher-protein foods such as meat and eggs. But studies now show that everybody is buying more. Every day, thousands more motorbikes and cars use India’s roads. A fast-expanding middle class is moving on from purchasing mobile phones to insurance policies and mortgages, setting up bank accounts, taking holidays and spending more on schools, health and consumer goods. Even old-fashioned industries that struggle elsewhere, such as newspapers, are booming in India.

The country can be immensely profitable. But that doesn’t mean it is an easy place in which to prosper. In October last year the World Bank praised India for improving its tax regime and the supply of electricity, helping companies to work. Yet the bank still ranks India only 132nd out of 183 countries for ease of doing business, as labour laws and red tape strangle entrepreneurs.

Standards vary enormously between states: The pro-business state of Gujarat gets big investments in energy and car production, while West Bengal, until recently run by communists, attracts few Indian or foreign investors.

Overall, two broad areas should attract investors to India. The first is infrastructure. A lack of logistics, such as cold-storage chains, means food travels inefficiently from fields to shelves. Some estimate that about 40% of what farmers grow is wasted.

Since India is the world’s biggest producer of milk, vegetables and some fruits, the losses are massive. Farmers, distributors and retailers are investing in infrastructure, but a huge amount of modernisation still needs to be carried out. The government plans for $1 trillion to be spent on wider infrastructure, such as adding 20 kilometres of highways per day in the coming years.

A second area to attract investment is consumer consumption. Aspiring Indians are ready to buy a great deal. Tens of thousands of bright, young Indians each year go to Australia, Britain, Singapore and the US for higher education. Increasingly, foreign academies and universities return the favour, setting up partner institutions and perhaps even campuses in India. The challenge will be maintaining the quality.

And see how middle-class Indians shop. Much has to be updated. The country is expected to get its first Starbucks this year. Gradually, online distributors are giving Indians what the rest of the world has enjoyed for years. Local answers to Amazon.com are flourishing. The best known, Flipkart.com, has a million registered users and monthly sales of $10 million.

If more reform comes, lifting caps on foreign investment in retail and easing land purchases, then other foreign business models can be taken to India. Bringing in a business model proven elsewhere may not always be easy, but some will be a great success.