The purchasing power of the Indian consumer

India is one of the fastest growing consumer markets in the world, but what do those figures mean for your business? What percentage of the Indian population actually belongs to your target group? And how big is the customer base for your products or services?

The size of your potential customer base in India and their purchasing power depends entirely on the industry you are in and the type of products you offer, but there are some general assumptions we can make:

• On the one hand, we see that the vast majority of India's nearly 1.4 billion people are young and poor and lack sufficient purchasing power to buy high-end, European products. Genexis, the European market leader in fiber optic modems, found that out too. Their modems were far too developed for the Indian consumer, so they built a special model for the Indian market. 

• On the other hand, India's middle class is expanding at lightning speed, increasing the demand for better products. The Indian middle class often sees foreign products as being of better quality, and this creates opportunities for international companies such as the Dutch clothing brand Scotch & Soda noticed. They opened 8 stores in India in 3 years and are now serving the fast-growing middle class online through their e-commerce platform.

This schematic representation of the Indian market provides a better understanding of what to expect and how best to rate your product or service:

The top end of the Indian market

In some sectors in India, there is no high-end market, but for others, such as fashion and electronics, for example, there is a large market. These consumers are often located in and around the largest cities, such as Delhi, Mumbai and Bangalore, but they cannot all be grouped under the same customer profile.

In India, having a specific, regional strategy is important to sell successfully. That means that within this segment, in principle, you must assume a small, exclusive group of consumers. Many companies think they can get around the regional approach by focusing entirely on e-commerce. A smart move when you consider India's rapid digital development.

However, as an entrepreneur, you must take into account the strict regulations in this area, it is currently still not possible for foreign companies to sell online directly to Indian consumers.

The Indian mid-segment

Many European companies have the idea that they can offer their high-tech, European products in the growing middle segment as well. But once they make their market entry, they find out that the Indian middle class still has much lower purchasing power than elsewhere.

In the first instance, therefore, it is smart to leave this segment out of the calculations for a while and in time, after you have started up in the higher segment, start thinking about how you can adapt your product to better suit the needs and price level of the Indian middle segment. After all, if you start focusing on the middle segment in addition to the high end, you might triple your sales market in a short time.  

Workshop: Market entry in India

Starting to export to India can be challenging for European companies who are not so familiar with the country. IndiaConnected helps over 100 companies every year with their activities in India. We work with local experts in all sectors and can therefore offer you a helping hand in shaping a successful market strategy for your business in our tailor-made workshops:

• We will give you more insight into what is involved in your market entry in India.

• You will receive valuable feedback on your current India strategy from independent experts.

• Expertise in every field: sales, manufacturing, legal, tax, finance, supply chain, recruitment, etc.

Our workshop usually lasts about 2 hours. Our experts will work with you to explore your issue and formulate possible answers and strategies. Afterwards, you will receive a report.

Merchant Trading: export directly from your Indian factory and avoid double import duties

India is becoming a very popular manufacturing location for European companies because of its large talent pool of highly skilled workers, low costs, excellent knowledge of the latest technology and strategic location. This makes India not only a great manufacturing hub, but also the perfect home base from where the region can be easily supplied. More and more European companies are therefore choosing India as a manufacturing location to export their products to neighboring countries.

If you use India as a regional manufacturing hub, you naturally want to be able to export your products directly from the factory, rather than having to send them to your European headquarters first. This direct way of exporting is called merchant trading. In this article, we explain how merchant trading from India works and how to get the right permits.

Merchant Trading as a European company

Merchant Trading means that a shipment of goods takes place from one foreign country to another foreign country through an "intermediary" or "merchant" in a third country and without entering or leaving the merchant's country. Merchant trading thus helps companies avoid paying double import duties.

Let's simplify this with an example. A Dutch company has a subsidiary in India that manufactures its products. The Dutch company has found a Singaporean customer who wants to buy the products manufactured in India. Instead of importing the products to the Netherlands and then exporting them to Singapore, the Dutch company asks the Indian subsidiary to deliver the products directly to the buyer in Singapore. This means the products never enter or leave the Netherlands.

In this case, we speak of merchant trading because:
- the supplier of the goods to be exported is the subsidiary in India;
- the buyer of the goods to be exported is the customer in Singapore;
- the merchant or intermediary is the parent company in the Netherlands.

But we speak of merchant trading not only when a subsidiary is involved, but also when a company purchases the products it will ship to the customer from a third party.

For example, the Dutch company receives an order from a customer in the US for a specific product that it does not produce itself from a customer in the US. The Dutch company places an order with a supplier in India who manufactures the product and asks the Indian supplier to ship the goods directly to the customer in the US. Again, the goods do not enter or leave the Netherlands, so again in this example the Dutch company is the merchant trader.

In this example, the Indian supplier sends its invoice to the Dutch company, which then sends its own invoice to the American customer. In the example where the goods are delivered by the Indian subsidiary, the international and local transfer pricing rules apply to the sale of the goods from the Indian subsidiary to the Dutch parent company.

Paying GST (VAT) on a Merchant Trade

According to the IGST Act delivery to a location outside India by an Indian supplier is treated as delivery of goods between two Indian states. In the CGST Act states that activities or transactions are not treated as a supply of goods if the goods are delivered from one place in a non-taxable territory to another place in a non-taxable territory without the goods entering India.

This means that in our examples, where the goods are supplied from India, the IGST Act applies and GST is payable. In the case where the trader is the Indian company, the CGST Act applies and no GST is due either.

Required documents for Merchant Trading from India.

The documents needed to ship goods from the supplier to the customer depend on the specific products being sold and whether the Indian company is the supplier or the merchant in the deal. If the latter, at least 13 documents must be submitted to enable the Merchant Trade. It is therefore strongly recommended to work with a local expert in this field, who can advise you on how best to set up the merchant trade and support you in obtaining all the necessary documentation.

Our experts are available to answer all your questions on this topic and to help you successfully complete your first merchant trade.

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Shashank Verma

Vice President of Supply Chain Management

This article was written in collaboration with vice president of Supply Chain Management, Shashank Verma.

Verma has over 22 years of experience in establishing business strategies, managing the supply chain of hundreds of European companies, establishing sound logistics in India and other related functions with a focus on revenue growth and profit maximization of organizations.

How to find a reliable distributor in India?

Successfully exporting to India is not done without an agent or distributor. After all, such a partnership provides access to local market knowledge and a sales team with a ready-made network. But how do you find a reliable Indian distributor with whom you can conquer the Indian market? Consultancy firm IndiaConnected offers five tips for European entrepreneurs to find a suitable Indian business partner.

1. Find a good distributor in India through your network

Formal avenues almost never lead to a suitable business partner in India, so it is important to leverage your network to find a reliable distributor. Start by networking in your home country with entrepreneurs already operating in India or through organizations and agencies with experience in India. From that starting position, you can then expand your network with working visits to India.

2. Build a personal relationship

Once you have found a potential distributor in India, it is very important to put time and energy into building a good personal relationship. This does not yield immediate business benefits, but this is vital in India to achieve a successful partnership. For example, invite the Indian distributor or business partner to Europe. If he is willing to invest time and money in a trip to Europe, this is a clear and positive signal: the potential business partner is professional and has serious interest.

3. Find out how influential the Indian business partner is

India is a country of hierarchy and networking. Therefore, the network and social background of your potential distributor is very important for the extent to which the business partner can operate successfully. Try to find out what kind of reputation the company has in India, how influential the distributor and/or family is and whether there are good contacts with the (local) government.

4. Doing business in India with the whole family

It is important to realize that you are not only working with your Indian business partner, but also with its family. Therefore, show interest in the Indian distributor's family and, if possible, try to establish a relationship with them as well so that you know what interests are involved in the background. On no account turn down an invitation to the business partner's home for dinner or to go along to a cousin's wedding. These are important moments when a relationship of trust takes shape. On the other hand, people in India also expect openness in return regarding your private life. This is often one of the best parts of doing business in India.

5. You don't have a deal until money is in your account

In India, a signed contract has much less value than in Europe. Therefore, start small: send a sample or a small trial shipment. If the potential partner is willing to pay for this, that's a strong, positive signal and you can start building on the collaboration.