India opening up doors to investment

The country’s reputation as a difficult place for business is changing after the prime minister’s efforts abroad to open the door to FDI. A series of reforms is intended to follow soon.

A man speaks on his mobile phone as he walks past logos of Vodafone painted on a roadside wall in Kolkata. Rupak De Chowdhuri / Reuters

Narendra Modi has been on a charm offensive to win over foreign investors in the past few months. India’s prime minister has travelled to the US, Japan and Australia to promise to overhaul a notoriously difficult environment for overseas companies.

Foreign firms have shied away in the past, despite the growing economy, rich natural resources and increasing wealth of its more than 1.2 billion population, amid challenges including excessive and unpredictable bureaucracy and a lack of infrastructure.

Steps in the right direction have been taken by the new government, after the Bharatiya Janata Party (BJP) came to power in May, and an increasing number of overseas companies are now looking again at India. But much more needs to be done before the subcontinent shakes off its image of having a difficult climate for foreign companies, analysts say.

“I think there are very positive signs, and I would say [Modi] has managed to create the necessary hype,” says Ashwajit Singh, the chairman and managing director of IPE Global, a development sector consultancy headquartered in New Delhi. “The interest of foreign investors to again start looking at India as a potential place to do business has definitely been aroused. I think the next step is to really be taken seriously in the sense that foreign investors really start actually planning to invest in India.

“Capital markets are still the easier way to get investment but I think the one that is more challenging, and of course better for the economy in the long term, is foreign direct investment. I think that would take anything up to about 18 months for that confidence to really come in and before we see some really big ticket investment coming in.”

Foreign companies are waiting for the implementation of promised economic reforms, including changes to land acquisition regulation and the introduction of a uniform goods and service tax, he says.

“Intention seems to be right,” says Mr Singh. “But implementation has frankly always been India’s biggest problem. We have over the last few years definitely developed a very bad image as far as foreign investors are concerned. I think the next 18 months are perhaps as important for India, if not more, than the 1991 reforms. Again, India is currently with its back towards the wall. But we have a prime minister who has the knack to market the economy in the right way.”

It is widely agreed that India needs to achieve economic growth levels of about 8 per cent to support and create enough jobs for its burgeoning population. This cannot be achieved through domestic income alone, and foreign capital is vital to propel the country’s economy to such heights. The latest economic growth data for India showed that a slowdown to 5.3 per cent for the quarter to the end of September.

“The environment has already started changing,” says Pranav Ansal, the vice chairman of Ansal Properties and Infrastructure. “Our prime minister, in the last six months has visited major countries, met every big leader of the world, and created such a good investment climate. I think from next year you’ll see a lot more foreign companies coming and setting up businesses and opening offices and investing more in India. That’s going to happen.”

The recent news that India is unlikely to appeal against tax cases won by Vodafone and Royal Dutch Shell marks a major turning point in the country’s business environment, Mr Ansal believes.

Confusing and sometimes unpredictable tax regulations in India have proved a major hindrance to foreign investment.

“It always takes time for an image to change and I think we have started the process,” he says. “If you ask me if it has changed, I would say not 100 per cent. I think it’s the first investments that take a bit of time. Once that happens and once we’ve started solving things like Vodafone tax issues, I think that matter will really push it forwards.”

Huge investments are still required in infrastructure, he adds.

Capital into the property and infrastructure sectors has not actually started flowing in, Mr Ansal says, although he has noticed increased interest from foreign funds over the past couple of months.

“In the country, you can see the stock market is at an all-time high and most of the investment is from FIIs [foreign institutional investors], so there is a clear indication that foreign funds are flowing into the economy. I think in 2015 we’ll see the number multiply manyfold and money coming to specific sectors and good projects.”

Significant measures that have been announced by Mr Modi’s government include easing foreign direct investment (FDI) rules for the property sector and the Make in India campaign to try to turn India into a manufacturing hub, as well as labour reforms.

Tom Albanese, the chief executive of Vedanta Resources, cites the Make in India campaign as “a great initiative by the government which will bring in an investment culture into India and invite large global companies to bring in their expertise, technology and investments”.

But India has to offer “a transparent and simple policy structure, quick decisions and congenial atmosphere”, he adds. “India is an extremely resource- rich country. In my view, a judicious utilisation of natural resources, the metals, mining and manufacturing industries is crucial to ensure inclusive development. One big opportunity lies in utilisation of India’s abundance of natural resources and inviting foreign companies to explore and develop these natural resources in the most sustainable manner for India.

As an economy, India can better realise its potential by tapping its ferrous and non-ferrous metals, oil and gas within our shores, he said.

“Today China, Brazil and other emerging markets have opened up to the prospect of resource exploration and production at home. India too has opened up, but there is still quite a way to go. To accelerate this growth is to tap the high reserve of natural resources which can contribute to the GDP of the country and spur investments.”

Ramesh Loganathan, the managing director of Progress Software, a US-based IT firm, and the president of the Hyderabad Software Exporters Association, says that for overseas companies looking to start operations in India, securing licences and permissions, it is still challenging. But the government is actively trying to improve this situation and simplifying those processes would remove a major hurdle, he says.

“One of the things that the industry was looking forward to was political certainty, which I think we finally have now,” Mr Loganathan says. “We are seeing the government being very proactive. It has a very investor- friendly disposition. We are definitely beginning to see foreign investors getting more active.”

Corruption is another major issue that India needs to deal with if it is to attract and retain foreign firms, says IPE Global’s Mr Singh.

Etisalat, for example, was badly burnt when it became unknowingly entangled in a US$40 billion telecoms corruption case, which resulted in the cancellation of 122 licences, prompting the company to leave India.

But the opportunities in the subcontinent are enormous.

“To be frank, foreign investors also cannot any more ignore India as a destination,” says Mr Singh. “Everybody around the world feels that those who managed to get into China before the economy really took off had the first-entrant advantage.

“India is an economy which is pregnant with promise. It now relies upon on whether we are able to deliver.”

Follow The National's Business section on Twitter