Despite problems with inflation and corruption and a recent dip in GDP, most German companies are in India for the long term and see the future optimistic.

In the first half year of 2011, bilateral trade between India and Germany hit a new high at more than 9 billion Euros. The annual growth of exports from Germany to India is at a breathtaking 35.9%, Imports from India to Germany grew at a still astounding rate of 19.6%.With this figures in mind it seems to be more than possible that the trade target set by German Chancellor Angela Merkel and Indian Prime Minister Manmohan Singh to reach 20 billion Euros in bilateral trade by 2012will be even exceeded in the next year. Also, German companies operating in India have more than enough reasons to take an optimistic look into the future – without forgetting to address the obstacles to Indian growth and bilateral relations. In many areas the Indian market is still highly regulated, and lack of infrastructure and corruption are still areas of great concern to German company leaders.

Still the optimism outweights the pessimism by far. This is the result of a representative survey conducted by the Indo-German Chamber of Commerce (IGCC) among 175 German companies in India in May 2011. The survey reveals that India’s consistently strong economic growth translates into a significant boost to the top and bottom lines of German companies operating here. This gives managers the confidence to substantially increase investments further. Eager to seize new market opportunities, investors are embarking on a hiring spree. In order to recruit and retain talent, most are budgeting for much higher salaries.

While most respondents feel that proliferating scams as well as policy drift have hurt India’s global reputation lately, companies so far see no need to reconsider their expansion plans. Corruption and bad infrastructure top the list of investor concerns. But despite an unfinished reforms agenda, India has emerged as a core market where most German companies take a long-term view - confident of sustained, rich rewards.

The extent to which German companies are already involved in India becomes evident in a new statistical report researched by the IGCC in addition to its “Business Monitor 2011” survey: Taken together, the 120 largest German companies in India currently employ about 173,000 staff. Over and above, they give employment through exclusive agents, dealers, vendors, franchisees and suppliers in the range of 300,000 jobs. This means German companies are a major employment generator in India.

India has become an attractive market and a production base for German companies, not just large companies, but also midsized companies in a wide range of industries. It is easier to do business in India now than it was in the years preceding 1991, when a host of regulatory reforms were initiated by the government. These reforms – such as deregulation of industrial sectors, reduction of import controls and licensing requirements – helped businesses operate efficiently. Foreign investments in almost all sectors barring a few were allowed. The outward looking growth strategy has also ensured a competitive business environment.

But it is not always easy to do business in India when compared to developed countries. Various aspects of setting up and running a business, such as land acquisition, obtaining different permissions and filing taxes can be complex. However, for many companies those restraints are far out weighted by the business opportunities the country holds. Reports suggest that about 2,700 Indo-German cooperative business ventures have been set up since 1991. The strong ties between Germany and India are further emphasized by more than 6,700 members of the Indo-German Chamber of Commerce.

India's fast-paced economic growth has helped companies in developed countries, including Germany, escape the stagnancy in local markets and find growth opportunities in India: increasing contribution of Indian subsidiaries to global corporations' bottom line confirms this. India has also helped several of these companies reduce their production cost and be competitive. Overall productivity gains and improvement in production quality in India has only helped them further.

India with a sustained economic-growth and stable business environment offers long-term opportunities to German companies. On the other hand, German companies with worldclass technology, innovation and expertise in various industries can increase product quality of Indian companies.

Key challenges that German companies face in India are related to speed and ease of doing business, which has significantly improved since 1990 but can still be slower and more difficult than what German companies are used to. Lack of adequate infrastructure is another major concern and so is lack of information and clarity on procedures and regulations, particularly with regard to tax and foreign investments.

A rather new area of concern is the cost of a well qualified labour force. Rapidly rising salaries risk impacting profits. High inflation and a sizzling job market fuelling attrition fears mean companies are facing significant salary increases this year. About three quarters of the companies asked for the IGCC‘s Business Monitor expected salaries to rise by more than 10% in 2011/12. Still the majority of the companies partaking in the survey expected labour force and salaries to increase in 2011/12. This is in spite of very rigid employment-laws, that often keeps employers from hiring more workers due to the difficult prospect of retrenching them during cyclical downturns, making it difficult to close down inefficient businesses. In addition corporate tax rates in India are quite high by Asian standards.

Asked to highlight one single area where they see the greatest scope for improvement in India’s investment climate, managers indicate a clear favorite: Almost one third name infrastructure as the most important area where India should improve. Reducing corruption (19%) and taming bureaucracy (15%) are seen as the other two most significant ways to further improve India’s investment climate and to attract even more companies from Germany.

Especially the corruption got a lot of attention recently with activist Anna Hazare forcing the government to promise a strong anti-corruption-bill to be passed within this year by going on a hunger strike. What seems to be the outcome of some major bribery scandals be it the Common Wealth Games, the Telecoms or mining actually seems to go much further. People are just fed up with a system where they are asked to pay for even the most simple things even though they are entitled for them. The roots of corruption in India are deep and have a long history. They were actually planted by the British who were able to manage a whole continent with just 8,000 civil servants on the simple principle that they were paying them little but were giving them a lot of power so that they were basically making their money from whoever needed their services.

This system of demand and supply in government deliveries was perfected during the License Raj in the seventies. It was paradise for the “Corrupt” in government and administration on the one hand and for those who knew how to manage the “System” on the other. In the end, the country went almost bankrupt since there was no competition, no quality, no efficiency and because nobody in the world wanted to buy the Indian sub-standard products, no exports, and thus no foreign currency. Luckily for India in 1991, the then Finance Minister Manmohan Singh could turn around the ship in the last minute, abolished the License Raj and saved the whole nation. Now we have a free market economy, exports are booming, and foreign currency reserves are at a record high.

It is important for German companies to know that in this environment it is not only possible but mandatory not to engage in corruption. Many of the international companies who by virtue of being publicly listed and scrutinized all the time cannot pay, or will not pay anybody and work on the basis “either you take the business or we just forget it”. Some of the mgo out of the way like BASF with their “Million Minds” project and Siemens with their Corporate Governance workshops and are trying to even share their knowledge and experience to avoid corruption to get a level playing field so that the best one gets the contract and not the one who bribes.

Those examples show that it is possible to adjust to the obstacles on the Indian market and –with good consulting - to overcome them. Many markets that are already matured in Germany are just getting started in India. India‘s potential as a market for cars is almost unlimited, and with an ever-rising energy consumption the country is in urgent need for green energy solutions. And India is not only a growing market to see products, the country also offers a very well educated workforce and can add sustainable value to research and development departments. Many German companies do not only produce and sell in India, they also employ numerous well educated engineers to develop new products or to alter them for the Indian market.

The steadily increasing trade volume over the past years and the increasing number of joint R&D projects and corporate investments in future markets such as biotechnology, nanotechnology, renewable energy and other green technologies promises a bright future in the bilateral economic relations. To expand the increasing growing partnership between India and Germany, the Germany Year in India will start in September. It consists of a series of events titled “Infinite Opportunities – Germany and India 2011-2012.” The year 2011 is of further significance for Indo-German relations: the two countries celebrate 60 years of diplomatic relations. However, as the series is titled, the significance of the relationship is not in the past events but in the future of Indo-German relations.