View: As key reforms change the India story, investors need to be made more aware of this change

For more than a decade, India’s efforts to attract FDI have been affected by a misconceived law that enabled certain transactions to be retrospectively taxed. GoI has now repealed the statute on its own sovereign terms, through its own national legislature. Investors can now look again at the world’s largest market opportunity, a view, according to a
September 2021 survey commissioned by Deloitte, is shared by business leaders in India’s four most mature trading markets – the US, Britain, Singapore and Japan. The broader findings are emphatic, both in affirming India’s strengths as well as challenges.

The survey was conducted at the peak of the second wave of the Covid-19 pandemic, but before the scrapping of the retrospective tax. Yet, India scored well. Some key findings:

44% of respondents said they were planning additional or first-time investments in India, while nearly two-thirds were targeting first-time investments within the next two years.

Most business leaders said their investments were intended to tap the home market rather than develop a local export base. The Japanese, famously applying the long lens, are way ahead here, viewing the home market as the key prize.

One surprise was that business leaders remain uninformed about how streamlined the business of business has become, as demonstrated by India’s elevation on the World Bank’s Ease of Doing Business Index. Business leaders in Singapore and Japan were the least knowledgeable about India’s efforts to transform the business environment.

While India is perceived as both politically and economically stable, it scored lower on regulatory clarity, protection of contractual rights and efficient judicial redress.

India’s ambition over the next five years is to double the size of its economy to $5 trillion, which is about the size of Japan’s today. To do so, India must convince foreign investors of its commitment to modernisation. Foreign investors typically judge a market on its potential and its protections, sandwiched in an overall environment that is fairly painless for business.

Today, India’s marketplace has been rewritten by progressive legislation and its processes streamlined by digital adoption. However, as the survey reveals, investors still seem unaware of the depth of this change. To make India more appealing, some game-changing changes can be considered.

Changing the Custom

The entirety of customs clearance – including customs bonded warehouses – has been placed on a digital platform, eliminating paperwork, crushing time and, overall, reducing the burden of regulation. This is an important systemic reform in a country where trade is about a third of GDP. India’s ‘across government’ digitalisation of public services has yielded security, simplification and efficiency in public services, thereby formalising the public economy.

The impact goes deeper. e-Retailers are plugging into India’s ‘digital spine’ with services for new online communities, such as small businesses. Given India’s demographics, this is transformational, but little-known among foreign investors.

Finally, as part of ‘Aatmanirbhar Bharat’ to expand manufacturing at home, India’s production-linked incentives (PLIs), fiscal benefits and regulatory clarity strengthen its linkages to new global supply chains. India now has a credible claim – demonstrated by its world-class engineering and technical labour force – for a place on new supply routes that emerge to withstand future shocks, whether geopolitical, climate or pandemic.

This, then, is India’s new ground reality for FDI. Despite capital inflows last year reaching record levels (10% year-on-year increase in 2020-21), India needs more.

India’s domestic savings and increased FDI are both critical to support the scale of investment necessary to achieve a $5 trillion economy by 2024-25. India requires FDI with a medium- to long-term view of opportunity, typified by global private equity, pension and sovereign funds. They have the long-term view required to support infrastructure development in energy, transport, healthcare, and the transition to a decarbonised economy.

Moreover, India’s recent FDI inflows have mostly gone towards paring down debt. If that bias can shift towards enterprises in the automobile, food processing, capital goods, pharmaceuticals and electronic goods industries, it would reinforce India’s strategic imperative, which is jobs-creating economic growth.

That is how FDI can be socially as well as economically meaningful. Small and medium enterprises (SMEs), for instance, employ fewer than 100 people, but add about a third of all economic activity, as measured by GDP. They were severely hit by the pandemic as industry and SME-dominated domestic supply chains ground to a halt. If India’s manufacturing becomes more attractive to global suppliers, it succeeds in a fundamental way – by creating jobs and equity.

Retro is Passe

Some foreign portfolio investors and manufacturers may be understandably sceptical. But there is a confidence in India’s resilience and potential, as conveyed by the survey. In the past month, that confidence has been strengthened by the abandonment of retroactive taxation and a recent Supreme Court ruling that recognised the fundamental sanctity of contracts. This was a test case with critical legal and symbolic significance, noted by foreign investors.

India’s story is being rewritten and deserves to be heard. As a new and transformed world emerges from the pandemic, it is for India and its allies to take notice.