Why FDI Covets India
For foreign investors though, India remains the holy grail: The last big business opportunity in an underdeveloped but booming consumer market
After a period of economic slumber, the Narendra Modi government is moving up a gear. The decision to allow 100 per cent foreign direct investment (FDI) in single-brand retail and construction will attract significant international funds. Cash-strapped real estate and infrastructure projects will get a boost. Foreign money has few places that offer safe and high returns. China cuts foreign investors down to the bone, leaving global companies with the crumbs. The Middle East is promising but politically volatile.
India’s ramshackle infrastructure – bad roads, poor quality housing, British-era bridges, shambolic small-town airports, decrepit public transportation and a low-tech SME ecosystem – presents a mouth-watering opportunity for FDI. Where else in the world would an American infrastructure or retail company in the Fortune 500 find a country with an aspirational middle class of over 300 million, still poorly served by the latest international high-tech products and services? Where else are returns on investment close to 10 per cent a year? With the rupee stable, even foreign exchange hedging costs have fallen.
What holds foreign investors back are three factors. One, inconsistent tax laws. The retrospective tax legislated by then Finance Minister Pranab Mukherjee and inexplicably kept in place by Finance Minister Arun Jaitley hangs like a sword of Damocles over companies like Vodafone and Cairn, part of the Vedanta group. The odium of this regressive tax has spread far and wide overseas and makes foreign investors wonder if the Indian government’s tax policies can be fully trusted.
The second factor holding foreign investors back is the (un)ease of doing business in India. Despite climbing 35 spots to 100 in the World Bank’s Ease of Doing Business (EDB) rankings last year, India is way behind other developing countries. The bureaucracy is a major hurdle. From environmental clearances to land use laws, it can be a nightmare to start an enterprise in India. One US-based entrepreneur whose office abuts mine, came to India with an ambition to take part in the Make in India initiative. He manufactured an innovative GPS device for trucks that enabled logistics firms to track movement of their goods across India in real-time. Confronted with reams of paperwork, licences that needed speed money to procure, and non-payment by logistics firms, he shut down his business in India last year and relocated to Singapore where everything, he says, moves like clockwork.
The third factor that discourages foreign investors is lack of skilled staff. Information technology companies doing basic BPO work face complaints from US/UK clients for poor articulation. Much of the low-end voice and book-keeping work is migrating to the Philippines, Vietnam and even Pakistan.
For foreign investors though, India remains the Holy Grail: the last big business opportunity in an underdeveloped but booming consumer market. If only tax inconsistency, a corrupt bureaucracy and poor skill levels were taken care of, India would be the world’s premier FDI destination by a long distance.
India of course has several assets. Its consumer class is big, young, growing fast, consuming ever-more, well-travelled and increasingly aware of global products and trends. Its purchasing power is rising. So are its aspirations. Taken in tandem, these demographic and economic factors put India in a sweet spot for global investors.
A widely accepted legal system (however slow) is another asset. Foreign investors are relatively confident that contractual obligations will be upheld by Indian courts and other arbitration mechanisms. The recent Tata-DoCoMo settlement has rebuilt some lost confidence. The ongoing tussle between the Indian franchise partner of McDonalds in the north and east and the parent firm in the US is another legal test case under close watch.
With globally recognised accounting standards and well regarded regulators of the stock exchange (SEBI), banking (RBI) and telecom (TRAI), India has an edge over China where regulation is often arbitrary. China’s one-party dictatorship bans Google, Facebook and Twitter. It is an ageing society. The country’s high debt-to-GDP-ratio is over 250 per cent.
English as the language of business is a key Indian asset. Much of global business, including in Japan, China and continental Europe, is conducted in English. India’s corporate sector, its audit standards, the robust business Press and qualified financial analysts are all attractive to foreign investors. To optimise those advantages and mitigate the liabilities of inconsistent tax laws, a slow-moving bureaucracy and poor skills, the government must move quickly to remedy them.
India’s sweet spot won’t last forever. Already Africa is presenting itself as the last great frontier. With a combined population of 1.27 billion, the 54 independent countries of Africa have an aggregate GDP of $2.3 trillion – figures remarkably similar to India. China has made rapid inroads by investing heavily in African infrastructure. India has the advantage of a local Indian-origin population in especially East Africa and South Africa. But Africa is a tough market to conquer. Corruption is endemic. Contracts are often broken. War and famine stalk the continent. Bharti Airtel’s $10.70 billion telecom investment across 17 African countries in 2010 has only now turned the corner after years of losses. And yet Africans, with a median age of just 27, are the future just as Indians are the present.
India’s FDI push is a small step forward in transforming the country into a dynamic market. Much more needs to be done. Starting a limited company should take weeks, not months. Closing a company should be made much easier. Labour reform is overdue – reform that is fair to both employers and employees.
The bureaucracy has a big role to play in this transformation. It must stop functioning as the Indian Asphyxiation Service (IAS). Jawaharlal Nehru called the IAS the steel frame of India. The steel has rusted. Unless bureaucrats see themselves as facilitators and not obstructionists, India will move forward like an old Ambassador car with the handbrake on.
The Prime Minister returned from Davos on January 24 after pledging to world leaders that India is open for business. The key word is “open” – transparent tax policies, a helpful bureaucracy and a skilled workforce. Those are the priorities for Prime Minister Modi as the crucial Budget session gets under way.
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