INVESTMENTS NEEDED: Indian workers are seen at a construction site. The investment slowdown comes as India urgently needs foreign funds to upgrade its dilapidated airports, roads, ports and other infrastructure in order to ease bottlenecks and spur growth.
NEW DELHI: Business consultant Adrian Mutton says it takes courage for a foreign corporation to make a big-ticket investment in India given the uncertainties thrown up by capricious twists in government policy.
Companies had long griped about India’s byzantine rules and suffocating bureaucracy but recent policy flip-flops had further soured the investor mood.
“You have got to be a pretty brave CEO to gamble on a major investment decision in India especially if you think that decision may be overturned,” said Mutton, who heads India-based Sannam S4, a consultancy which helps firms enter India.
The latest, and for many investors most egregious government measure, was announced in last month’s budget which included provisions allowing India to tax foreign takeovers retroactively to 1962.
The plan seeked to override an Indian Supreme Court judgement in January that rejected a US$2.2-billion tax bill slapped on British phone giant Vodafone over its 2007 purchase of a local operator.
“The Indian government is perhaps hoping the country’s economic growth potential will retain companies like Vodafone,” Deepak Lalwani, chief of India-focused investment consultancy Lalcap, said.
“But fresh capital will be fearful of the business and investment climate and will be hesitant to come,” Lalwani told AFP, cautioning that poor investor sentiment “may dramatically slow future foreign capital.”
Already, gross foreign direct investment in India had fallen by a quarter to US$20.3 billion in the fiscal year ended March, down from US$27.1 billion in the previous year, according to official figures.
In a letter to Premier Manmohan Singh earlier this month, seven global business groups, including the Confederation of British Industry and the US Business Roundtable, warned of a “widespread reconsideration of the costs and benefits of investing in India.”
The investment slowdown came as India urgently needed foreign funds to upgrade its dilapidated airports, roads, ports and other infrastructure in order to ease bottlenecks and spur growth.
Economic expansion for the last fiscal year was estimated at just 6.9 per cent, the second slowest rate in a decade.
The retroactive change to India’s tax code was only the latest piece of news to dismay foreign investors, already preoccupied by policy paralysis on reforms to liberalise the economy and corruption.
The investment plans of Norwegian telecom giant Telenor and other foreign firms who had jumped into the world’s second-largest mobile market were left in tatters earlier this year when the Supreme Court cancelled their licences.
The court’s move stemmed from a scandal in which the government had issued mobile licences in 2008 at throw-away prices, costing the public treasury up to US$39 billion, in what was believed to be India’s biggest graft case.
The licence cancellation “was a shock for the foreign operators, especially as this was a ruling on a government policy decision,” Kamlesh Bhatia, India research director at global consultancy Gartner, said.
And last December, in a major U-turn, the government reversed a decision to allow foreign supermarkets into India after a key ruling coalition ally said the move could hurt millions of small shopkeepers in the country.
“The reform process has really just fallen apart,” Manjeet Kripalani, head of Gateway House: Indian Council on Global Relations, told AFP.
Further discouragement has come from a slew of stalled projects, including South Korean steelmaker POSCO’s plans to build a US$12-billion steel mill – first announced in 2005 and trumpeted as India’s biggest foreign investment deal.
Late last month, an Indian tribunal suspended environmental clearance for the plant, keeping the project in limbo.
Still, said Mutton of Sannam S4, many global companies had little choice but to enter the increasingly affluent country of 1.2 billion people if they wanted to boost revenues in light of the slowdown in developed economies.
“You can’t afford not to be in India as a marketplace when you look at the huge population,” says Mutton, whose India advisory business has tripled in size in the past few years.
“In boardrooms around the world, people are saying if we are going to deliver growth, where do we go? India inevitably comes up. They may know it will be a pain in the backside — but they have to make the best of the situation.” — AFP