India’s recently elected BJP government, led by the charismatic Narendra Modi, is expected to create a more business-friendly environment that will further support confidence and investment, with many predicting the worst may be over for the Indian economy.
“The new government has changed sentiments of both foreign investors and Indian corporates,” says Nishant Parikh, partner at Trilegal law firm in Mumbai, “there is a general feeling that a big upswing in the economy is around the corner.”
With an image of an industry-friendly leader, Modi had already proved his credentials during his 12 years as the chief minister of India’s highly prosperous Gujarat state. The resounding victory that his party achieved in the country’s May general elections has made investors even more excited.
The Bharatiya Janata Party (BJP) won a clear majority in a 543-member lower house, an achievement that no other party could manage in the past 30 years. However, the victory is credited solely to Modi for his mass popularity.
“Given Modi’s autocratic reputation, this may not be a government but effectively a one man show,” says Azmul Haque, consultant at Olswang in Singapore, “But this is probably what India needs, a strong person at the centre to take decisions and implement them.”
Furthermore, Haque says that the confidence in the new government is clearly visible as the interest shown by his Singapore-based clients in the Indian economy along with the private equity investments has grown by at least five times since Modi took office.
Law firms in India too are experiencing the same trend. According to Parikh, billions of dollars of investment proposals are in the pipeline. “We have expanded through the downturn, but now, the rate of expansion should be higher,” he says.
Parikh says that in the coming months, there will be many deals involving Indian groups receiving funding from foreign investors for semi-developed or partially completed projects. “It will help Indian companies to fund their cost overruns, refinance their liabilities and create new opportunities in the market,” he says.
Furthermore, according to Parikh, there are clear signals that foreign investors are actively sourcing new mergers and acquisitions in addition to private equity investment opportunities.
The investors’ expectations grew in July when the new finance minister Arun Jaitley presented his first national budget, but no major policy decisions were announced then. According to Haque, even though the budget is somewhat conservative, the government has managed to assuage the fear of foreign investors.
It might be too early to expect any drastic reforms by the new government, but the investors were looking for a quick reversal of a controversial provision relating to retrospective taxation, which was brought in by the previous government.
The law relates to a dispute over a $2 billion tax claim by Indian authorities against UK’s Vodafone in relation to its acquisition of the telecom company Hutchison. That deal was done through an indirect transfer of shares at an offshore financial centre. After the Supreme Court of India ruled in favour of Vodafone, the previous Congress party-led government introduced an amendment to the Income Tax Act, which taxed indirect transfers of Indian assets retrospectively from 1962, thus bypassing the Supreme Court order.
While calling the new tax law as the biggest source of unhappiness for the investor community, Haque says that these proposals could create significant retroactive tax liabilities for international mergers and acquisitions into India going back to 50 years. “It would also eliminate a tax exemption that many investors came to rely upon,” he says, “No business likes uncertainty, particularly for tax implications as they hit the bottomline.”
Acknowledging the seriousness of the issue in his budget speech, Jaitley tried to reassure the investors. “This government will not ordinarily bring about any change retrospectively which creates a fresh liability,” he said, “We are committed to provide a stable and predictable taxation regime that would be investor friendly and spur growth.”
Jaitley also said: “I hope the investor community both within India and abroad would repose confidence on our stated position and participate in the Indian growth story with renewed vigour.”
However, investors are still not impressed. “That is just an assurance,” says Parikh, “The finance minister would have won over investor sentiment if he had withdrawn the claim against Vodafone and struck down that provision.”
According to Haque, the government has given some indications that there would be a stable, transparent and certain tax regime for foreign investors, and the controversial retroactive tax policies may soon be abandoned. However he says that “there is disconnect between the government’s promises of a non-adversarial tax regime and its implementation by the bureaucratic tax department that tries to maximise tax revenue.”
The red tape created by an unwieldy bureaucracy along with endemic corruption and working inefficiencies in India are the biggest concerns for investors from Singapore, says Haque. “The government will need to work on number of aspects to make it easier to do business in India,” he says.
Narrating a real estate-related investment undertaken by his firm for a healthcare project in India, Haque says that the deal involved land that could not be sold or taken on a long-term lease because it belonged to a private trust. The only way out was to assign the development rights over the land to an Indian company that would construct the hospital building and only this building structure could be owned, not the land itself. “Our clients struggle to understand such a system as it was unusual in their experience from a developed country’s legal system,” he says.
Haque also expresses concern over the fraudulent practices undertaken by target Indian companies. “We have come across situations where some Indian businesses looking for foreign investment have acknowledged the presence of more than one set of books and accounts,” says Haque, “There would be one set maintained for foreign investors, one probably for compliance or tax reasons and there might even be one more – the real set of accounts.”
Haque adds that “it is difficult to get a true picture of a business without a comprehensive due diligence, and even then, well-drafted representations, warranties and covenants are needed from Indian promoter groups.”
According to Haque, most foreign investors from Singapore compare between the ease of investing in China with that in India. “In China, because of the statutory power structure, foreign investment procedures are centralised - the investment agencies help you implement your project and provide you the last mile support to make sure that it is completed,” he says.
At the same time in India, says Haque, “the government may welcome you, but thereafter, all your troubles start as you need to navigate various national, state and local bureaucracies in order to get things done – often among agencies that have no coordination with each other.”
Furthermore, according to Haque, “many foreign investors haven’t considered India very seriously because they have limited resources, and would rather pursue something that is more tried and tested.”
Among the measures to redress investor complaints, the new Indian government plans to make all business- and investment-related clearances and compliances available online with an integrated payment gateway. All central government departments and ministries will integrate their services with an eBiz platform on a priority by the end of this year, finance minister Jaitley said in his budget speech.
Parikh calls the eBiz platform an extremely important move for businesses, but warns that “it is easier said than done as the bureaucracy is often stronger than political will when it comes to implementing changes.”
Among the major investment sectors that have not achieved desired growth is insurance, and remedial steps have been initiated. In his budget speech, Finance Minister Jaitley said that “the insurance sector is investment starved,” and therefore, the limit of foreign investments in the insurance has been increased from 26 percent to 49 percent.”
According to Parikh, the increase has drawn the maximum attention because this alone is estimated to lead to $10 billion foreign direct investment in the next five years. “Ideally, foreign insurance companies would have liked an increase of 51 percent, but since the ceiling has been stuck at 26 percent for a long time, this is a welcome change,” he said.
These developments are significant because in recent years, many foreign insurance companies have exited India. “It requires a lot of investment and continuous funding of capital for many years until the business matures,” he says, “With 49 percent limit, the ability of foreign insurance companies to fund those large capital requirements has gone up and there will be more commitment from them.”
Modi must also target investment policies to benefit India’s large and growing population. According to Parikh, one of the biggest agendas of the new government is job creation, given that India is going to add the highest number to the world’s working population in the next 10 years in comparison to any other country. “For that, there needs to be a new and very large capital expenditure in manufacturing,” he says, “and such investment will happen only when there is good infrastructure, efficient bureaucracy and relaxed labour laws.”
Indeed, India’s archaic labour laws for manufacturing units not only make it almost impossible to retrench the workforce, but even require companies to get an approval from the government for changes in their working conditions.
“These are problems that have existed in India for decades,” says Parikh, “However, the state government of Rajasthan has made a beginning by greatly relaxing labour laws, and perhaps some other states will also follow.”
In July, Rajasthan’s BJP government amended laws that will allow companies to retrench up to 300 employees without seeking government permission and would also make it difficult to register labour unions. The earlier limit for retrenchment was 100. “It is still very early days but fundamentally, these are good changes,” says Parikh.
The other major hindrance for India’s industrial development and investments is the poor state of infrastructure that has been struggling to keep pace with the rapid economic development in the country. In the union budget, the government has committed to build more highways, airports and power plants. However Parikh says that “if the government implements even half of what have been promised, or even half of what the previous government had left unfinished, we will see massive changes in the economic landscape.” Given this emphasis, infrastructure, engineering, construction and financial services sectors should witness significant growth, he says.
Indeed, according to Shyam Raghuwani, a Delhi-based private consultant to foreign investors and a former banker, there is a sector-specific approach by investors from various countries. In India’s real estate sector, companies from the Middle East, Singapore and Hong Kong are particularly interested, while there is a competition going on between Japanese and Chinese companies to invest in the modernisation of Indian railways, he says. “China is offering lower cost but given a more reliable overall relationship, Japan might be given preference,” he says. The picture will become clearer in the next one or two years, he adds.
Raghuwani says that investments will spurt after October by when Modi would have completed his tours to Japan, China and the United States. “U.S. and European investors will be watching how he is received in the U.S.,” he says, “Once a positive message comes from the Obama administration, many American and European companies will invest [in India].”
Most of the European investments will come from Germany, says Raghuwani, which along with France, is very keen to invest in the infrastructure and defence sectors. “Many foreign investors are in a hurry as most of the business decisions are taken in [the] first two or three years of a government before it starts preparing for the next elections,” he says.
For now, Modi has seized the initiative and it is a new beginning as according to Haque, the capability of the Modi-led government to spur growth and investment in the country has already been acknowledged by the investor community. “Evidence of this is seen in the fact that the Indian Rupee has recovered from the record low of August 2013, the stock market is up about 30 percent since then, and foreign exchange reserves have been rebuilt,” he says.
