India is the second most populated country in the world, with nearly one billion people. It has a reasonably favorable pro-business environment that aims to attract multinational companies (MNCs). Because of this enormous market size and positive business climate, scores of American firms--including General Electric, General Motors, McDonald's, Kellogg's, and Microsoft--have recently entered the Indian market. As a result, the country has forged strong commercial interests with the United States, with trade and business relations across many industrial sectors. In fact, the U.S. is India's leading source of technology and her most valuable investor.

However, any company that desires to enter the Indian market must realize the serious challenges of doing business there: segmenting the marketplace properly, understanding the country's economic and political situations, getting through the government bureaucracy, and understanding deep-seated cultural biases and attitudes. It is hoped that a discussion of the Indian marketplace in terms of market potential, culture, consumer behavior, and selling aspects can add to other articles published recently in Business Horizons* and aid MNC executives in facing those challenges successfully. Sprinkled with numerous success tales and war stories, the discussion offers insights gleaned from a survey of Indian businesspeople (shown in the Sidebar on the next page)--insights that can help provide a reality check on the Indian market potential.

True Market Potential

A fairly large country, India is nearly 2,000 miles from north to south and some 1,800 miles from east to west. The current population of nearly one billion is growing at about 1.7 percent per annum. Only about a quarter of the population live in an urban environment; the rest reside in rural settings.

When American executives reflect on the size and situation of India's potential customers, they erroneously conclude that the Indian middle class is analogous to the middle class in the United States or Europe. The reality, however, is that the income levels characterizing the Western middle class represent only a tiny upper class in India.

The Indian market can be divided into four levels in terms of purchasing power, as shown in Table 1. The reality for American businesses is that only Level 1 customers are willing to purchase foreign-based firms' goods and services, with only a marginal hope of selling to Level 2 consumers. Hence, the Indian market potential for American firms is only 73 million consumers, not the almost one billion population of the country. Nevertheless, though only 7.5 percent of the country's population, 73 million is still quite a large market when compared to many other developing nations.

Two particularly attractive segments are urban youth and the rural population. Krishna Rao Gowd, General Marketing Manager for India's Sunku Auto Ltd., stated in the survey that "the new generation is showing an inclination toward impulsive buying." However, he cautions,

Lots of purchase decisions of youngsters are still to be blessed by the elders. For example, buying a TV or a refrigerator is a collective decision, even though it is to be used by a newly married couple living 400 kilometers away from parents.

Another survey respondent added, "Increasingly, India's rural market (and there are some very rich farmers and others in the countryside, believe me) will become important." Similarly, says Mr. Gowd, "Look to rural India, which has vast potential."

Market Diversity

A second reality of the Indian market structure is the fact that India has 17 official languages and an ethnic diversity as wide as that from Britain to the Middle East--not to mention 26 states, dozens of castes, and six major religions. The 5.7 million people in Chennai (formerly Madras) have vastly different tastes than the 8.5 million people from New Delhi, the 11.2 million in Calcutta, and the 12.8 million in Mumbai (formerly Bombay). Such a diverse marketplace has a tremendous impact on product labeling, product variety, and where products can be sold successfully. McDonald's provides a good example of adapting to the diverse Indian marketplace. Though famous for its beef patty entrees, it has introduced vegetable burgers to the large Hindu population and mutton patties to Indian Muslims.

Tailoring goods and services to the local preferences is not a trivial undertaking. American firms must realize that much market research is needed to understand the regional consumer demands. And they must be willing to modify offerings at the local level.

ECONOMIC AND POLITICAL ENVIRONMENTS FOR DOING BUSINESS IN INDIA

To better understand the Indian marketplace, it is important to gain some perspectives on the country's economic and political environments. So our discussion will shift to India's political system, recent policies for opening the economy to foreign businesses, agreements with the United States, and strategies for getting through bureaucratic hurdles.

The Political System

India is a federal republic of 26 states and seven union territories. The country has a two-house parliamentary legislative system: the indirectly elected Upper House, the Rajya Sabha; and the directly elected Lower House, the Lok Sabha. The judicial system is an independent branch of government; the legal system is based on English common law. National and state legislatures are elected for five-year terms, although terms may be extended in a state of emergency and elections may be held early if the government loses Parliament's confidence. The Prime Minister is elected from the majority ruling party in Parliament.