German companies see India as a strong growth market despite challenges

German multinationals are increasingly considering India as a strategically important market for their growth and presence, according to a study by KPMG and the Indo-German Chamber of Commerce.

The study found that despite challenges in the economic environment, over half of the German companies surveyed (59%) are planning new investments in India this year. This shows a significant increase from previous years, highlighting the growing appeal of India as a key market for German businesses.

A growing opportunity for German companies

German companies view India as a country of significant growth potential. The survey reveals that 78% of respondents expect rising sales, and 55% anticipate higher profits for the current financial year. In the longer term, 82% foresee a continuous increase in turnover, with 37% predicting sales growth of over 20% by 2029. Moreover, 74% expect higher profits, with a quarter of the companies expecting profit growth above 20%.

One of the driving factors behind this optimism is India’s economic resilience, particularly when compared to other Asian markets. As China’s economy faces a slowdown, India’s economic growth offers German companies a more stable and promising environment for expansion.

India’s large population, increasing political stability, and sustainable growth prospects are key reasons why 45% of German companies are planning to use India as a production hub not only for the local market but also for the broader Asian region by 2029, a significant rise from the current 33%.

Key drivers: Low labor costs and political stability

German businesses see several factors that make India an attractive location for investment. Chief among these is the relatively low cost of labor, which is cited by 54% of surveyed companies. Despite expected wage increases over the coming years, India still presents a cost advantage when compared to other regions.

Another major attraction is India’s political stability, which 53% of companies believe is a critical factor in their investment decisions. In addition, India’s well-educated labor force is a key draw for businesses that need highly skilled professionals. Nearly half (47%) of the companies surveyed mentioned India’s pool of qualified specialists as a significant advantage.

Challenges: Bureaucracy, corruption, and the tax system

While the potential for growth in India is clear, German companies also noted significant challenges when setting up and operating in the country. Bureaucracy remains one of the most persistent obstacles, with 64% of the survey respondents identifying it as the top concern. This represents an 11% increase from the previous year, signaling that the regulatory environment in India is still seen as a significant hurdle for foreign investors.

Corruption is another critical issue, with 39% of companies naming it as a concern, although this figure has improved from 47% in previous years. The complexity of India’s tax system is also a major challenge for German businesses, as 27% of respondents pointed to the tax environment as a barrier to growth.

As the survey from KPMG and the Indo-German Chamber of Commerce was conducted shortly before the election results were announced, it gives an indication of the demands German companies have towards the new government.

Two thirds of respondents (67%) hope for simplified regulations, a fight against corruption and greater legal certainty in the country. In second place comes the desire to expand and modernize the infrastructure. This is what 55% of companies want. A liberalization of trade and a promotion of exports are hoped for by 48%.

“With Modi's re-election, German companies hope that many structural problems will be tackled. These include the infrastructure deficits in the areas of transportation, energy, information and communication, the complex tax system and the highly varying regional regulations. Only by solving those topics it will be possible that the growth expectations can be achieved in the medium term,” said Andreas Glunz from KPMG.