Cameron & Co woo India as demand for retail goods rockets

India has been a cheap supplier of goods to the West in recent decades, but as its own economy grows, the direction of trade is turning.

Now it has a consumer market to which other nations want to export. That's why the Prime Minister led a phalanx of politicians and businessmen through the country last week.

While Britain and other Western economies struggle in the aftermath of recession, the Indian economy has grown by 8.6 per cent over the past year. The 1.15 billion population is expanding by 15 million a year: some 300 million are defined as middle class by the World Bank, and almost 500 million are aged under 15. These consumers are fuelling a retail market that expands by 25 per cent annually: every month 15 million people are acquiring mobile phones, and car sales jumped by a quarter in the past year to 1.5 million vehicles.

The former Labour cabinet minister Patricia Hewitt, who now chairs the UK India Business Council, says: "India, one of the world's most exciting and fast-growing economies, offers opportunities that no British business can afford to neglect, particularly as we emerge from the global financial crisis."

Ms Hewitt accompanied the Prime Minister on his trade mission, along with the Chancellor, George Osborne, the Foreign Secretary, William Hague, the Business Secretary, Vince Cable, and the universities, culture and energy ministers. With them were the heads of major UK companies, including BAE, Vodafone, Standard Life, the Aviva insurance group, B&Q, Penguin Books, 3i and Standard Chartered. The chiefs of the CBI and the Institute of Directors were among the 40-strong business delegation.

The deals they signed there emphasise the fact that India is now an important export market rather than simply a low-cost supplier. Indeed, as wages in the country increase – GDP per head has doubled since 2000 – its cost base is rising, making it less competitive. But manufacturing accounts for just over 20 per cent of the economy – not that much higher than in Britain – and the service sector is already bigger than industry and agriculture combined.

Half that manufacturing output is sold abroad, however – and half of that to Europe, where Britain is India's biggest customer. Sir Andrew Cahn, chief executive of the Government's UK Trade & Investment agency, says: "The UK's trade with India has doubled since 1993 and currently stands at £11.5bn. But we can do more."

That trade comprises £4.7bn of exports compared with £6.8bn of imports. Mr Cameron pointed out last week that UK sales to the four emerging Bric countries – Brazil, Russia, India and China – total less than our exports to Ireland. He thus wants to see India buying more from Britain and investing more in the UK. The former colony is already the fourth-biggest investor in this country based on the 92 projects backed over the past year, but that created fewer than 6,000 jobs.

In total, 700 Indian companies operate in Britain, however, compared with only 500 in the whole of the rest of the European Union. They employ 90,000 people in the UK, half of them with Tata Group, the owner of Jaguar and Land Rover, which is now Britain's largest manufacturing employer.

Last week, one company, Eros International, a distributor of Bollywood films in Britain whose shares are dealt on London's AIM market, announced plans to move to Britain's main stock market. The London Stock Exchange's chief executive, Xavier Rolet, was also on the trade mission, as Indian firms already have close links with the exchanges. Over the past few years, the 66 Indian-linked firms on the London stock markets have raised £5bn.

One FTSE100 company, Vedanta Resources, has an Indian chief executive and chairman, and Vodafone, whose current chief also travelled with Mr Cameron, was previously headed by the Indian-born Arun Sarin. The Prime Minister wants to make greater use of the sub-continent's entrepreneurial talent, tapping into the two million people of Indian origin who live in Britain. India is also the second-biggest source of foreign students in the UK.

British business has long used India for its call centres, but now that country's companies are using their computer skills to offer jobs in Britain. More than 180 Indian companies have invested in the IT sector in the UK. Graham Vickery, an economist with the Organisation for Economic Co-operation and Development, says: "The acceleration of economic growth has reduced poverty both at state and national level. Impressive transformation and growth of the economy have created opportunities both in exporting software and services and in the domestic market."

While India exports its IT, British companies are chasing after contracts to build the new airports, metro systems and other projects that the increasingly affluent country can afford. Sir Andrew Cahn says: "Infrastructure represents a huge opportunity in India. According to the planning commission, over $500bn of funding is needed for new power stations, airports, roads, railways, seaports, waterways and urban infrastructure. India has 80,000km of roads that need expanding or building."

Ironically, while the coalition has stalled on nuclear electricity generation, he adds: "We are also making clear the UK's readiness to co-operate with India on civil nuclear power to provide low-carbon fuel." The chief executive of Britain's Nuclear Industry Association was drumming up business there last week.

But for all the opportunities, there are also clouds over the Indian market. For a start, Britain is only one of many mature countries hoping to exploit this emerging market – and we are not at the front of the queue. Gordon Brown set a target in 2007, shortly before becoming prime minister, of doubling our exports to India by 2010, but by last year they had increased by only 7 per cent. His target for 2020 was to quadruple sales.

Over a decade, Britain has dropped from fourth to 18th as India's main source of imported goods. India ranks even lower on the table of UK imports, even though our language, legal system, culture and history should give Britain an advantage.

And although India avoided recession, its growth rate has dipped from the double-digit level of the mid-decade. Inflation is above 7 per cent and predicted to rise further. The central bank last week raised interest rates for the fourth time this year, to 5.75 per cent.

Sanjiv Duggal, who runs HSBC's global equity fund, admits rapid growth has created bottlenecks in supply chains. He says: "We do not expect overheating in the economy will be a concern." Instead, he fears Western demand for India's output will falter. "The main risk to the equity market is that the European debt crisis is longer and more prolonged than expected."

George Osborne lobbied last week for greater access for banks such as HSBC. With Standard Chartered and Royal Bank of Scotland, it is among the four biggest foreign retail banks in India, but it has only about 100 branches in 31 cities. The Chancellor wants banks to have licences to set up in smaller towns, but progress will be slow. The Indian government has only just allowed foreign investment in insurance companies to rise from 26 to 49 per cent.

Britain's best hope may be in selling goods rather than services, which an educated and aspiring population can provide for itself. Whereas the West once exploited India by giving the country its low-tech, low-paid jobs, India is increasingly outsourcing its basic processes to the West.

And one of the main blockages on UK exports there is the red tape, especially at customs, that delays sales. Cameron sought to get that eased last week, but also called on the EU and India to conclude a free-trade agreement by the end of this year. He may also try to reactivate the Doha round of trade talks that have stalled after nine years.

But he made no pretence of who he hopes will benefit from easing trade relations between the two countries. He wants India to open its markets to rescue the UK economy. "This is a trade mission, but I prefer to see it as my jobs mission," he admitted in Bangalore. "I want this to be a relationship which drives economic growth upwards and drives our unemployment figures downwards."

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