FDI Needs India

India has emerged as one of the world’s most attractive investment destinations. Several factors have come together to create a sweet spot for the country.

The first is China’s slowing economy. Highly leveraged Chinese banks are a heartbeat away from a debt trap. Real estate and stocks present a picture of turbulence.

As Ruchir Sharma writes in his new book, The Rise and Fall of Nations: “It will be difficult for any country to grow as rapidly as 6 per cent, and all but impossible for China. Nevertheless, in an effort to exceed that target, Beijing is pumping debt into wasteful projects, and digging itself into a hole. The economy is now slowing and will decelerate further when the country is forced to reduce its debt burden, as inevitably it will be. The next step could be a deeper slowdown or even a financial crisis, which will have global repercussions because seven years of heavy stimulus have turned the world’s second largest economy into a bloated giant.

“In Beijing, confidence has given way to a case of nerves. Local residents often sense trouble coming before foreign investors and are the first to flee before a crisis. Chinese moved a record $675 billion out of the country in 2015, some of it for purchases of foreign real estate. If China were eating America’s lunch, its people would not be rushing to buy safe-haven apartments in New York or San Francisco. Far from conspiring to cheapen its currency, as Mr. Trump charges, Beijing is struggling to keep the weakening renminbi from falling more, which would further erode local confidence and make a crisis more likely.”

The second favourable factor is India’s recent uptick in reforms. Foreign direct investment (FDI) has been liberalised across sectors. Red tape may not have quite been transformed into the red carpet Prime Minister Narendra Modi promised in his 2014 Lok Sabha election campaign, but the ease of doing business in India has risen several notches.

India On Investors’ Radar
Global investors are noticing. As Dominic Barton, CEO of McKinsey, said recently: “People had given up on India. They felt India is too complicated and it was difficult to get anything done. It had dropped in the last five years on people’s priority (list). I think it has gone right back up, people are interested, obviously people are going to want to see action but I think the feeling is they will, because this government seems serious. I was not (advising clients to come to India) two years ago because it was complicated... and companies and clients were deeply frustrated with the bureaucracy, no decisions getting made. Companies were saying... let us go to Africa, let us go to Nigeria, let us go to Indonesia, let us just go to the US, but that has changed. I think because if you look at the trends that are going on in the world, India is right in the centre.”

The third factor driving investment into India is a conflation of domestic events. The Seventh Pay Commission will put an extra Rs 1.02 lakh crore a year in the hands of nearly one crore government employees. That’s over Rs one lakh per employee per year. Some of those additional funds will go into consumption, the rest into savings. On cue, the stocks of consumer durable, automobile and FMCG companies have risen. A good monsoon will spur rural demand as well. Agricultural growth will rebound.

In A Bright Spot
In this benign environment, the Indian economy, as McKinsey’s Barton says, is a bright spot. Europe remains sclerotic. Brexit will keep British growth subdued for years till it rebalances its economy. The US economy is turning sluggish with growth slowing. In eight Obama years, US GDP has not once grown annually at a rate higher than the historic long-term average of 3.30 per cent.

No wonder American, Chinese and European companies are lining up to do business in India. Apple will likely start its own stores in India following tweaks in the recently liberalised FDI policy. Alibaba is investing heavily in Indian e-commerce startups. Uber and Amazon have pledged billions of dollars to ramp up operations in the Indian market to take on domestic players like Ola and Flipkart.

Some Niggles Remain
And yet India is far from being a perfect marketplace. There are two principal shortcomings that need to be fixed.

First, the legal and judicial system. Commercial disputes take far too long to resolve. Vodafone’s debut IPO in India has been delayed at least partly because of legal wrangles over tax claims.

Second, certainty of the tax regime. The retrospective tax introduced by then finance minister Pranab Mukerjee — and inexplicably not repealed by the current finance minister Arun Jaitley — has done more harm to India’s business credibility than any other misstep. Investors, domestic and foreign, want certitude of tax laws. India’s tax system carries the detritus of the UPA regime. Jaitley and the bureaucrats of the finance ministry have been unable — or unwilling — to clear up the debris. Prime Minister Modi must step in to remove this hurdle. The cabinet reshuffle, with two new ministers of state inducted into the finance ministry, is a move in the right direction.

Last Big Opportunity
Foreign investors aren’t flocking to India because they love India. They regard India as the last big underdeveloped market opportunity to extract the high returns that are no longer possible in Europe, America and Japan. But India can’t afford complacency. Africa, with roughly India’s population of 1.25 billion but spread over 54 sovereign nations, increasingly beckons. Despite endemic corruption and civil wars it will almost certainly emerge as the next big investment destination. Chinese, European, American and Indian companies (like Bharti Airtel and Vedanta) are already in Africa. More will follow.

India’s federal system is a huge advantage. Once the Goods and Services Tax (GST) Bill is passed in Parliament, that federal structure will gain added lustre. Foreign investors need India as much as India needs them. But India must shed its bureaucratic somnolence and embrace the sort of technocratic mindset that Niti Aayog CEO Amitabh Kant has displayed. That must be the Modi government’s priority as the second half of the Prime Minister’s term unfolds.