Year in Review: What Foreign Investors Expect from India in 2020

India had a significant 2019. Prime Minister Narendra Modi’s government was reelected with an overwhelming mandate, policy reforms continued to prioritize making it easier to do business in the country, and more sectors were opened to foreign investment.

The country also emerged as one of the top investment destinations for foreign investors despite an ongoing slowdown, receiving the highest ever FDI inflow at US$64.37 billion in 2018-19, according to the Department for Promotion of Industry and Internal Trade (DPIIT).

Here, we review some of the major developments that defined the country in 2019 and how it might impact India’s business landscape in 2020.

A victorious second term for Prime Minister Modi but investors watching pace of economic reforms 

The second term for Narendra Modi was not really a surprise to election watchers in India. Since 2014, the government has been criticized by economists, policy experts, and opposition leaders alike for a multitude of reasons – but on the ground Modi remains an almost revered figure.

With a message of economic empowerment, development, and to make India a US$5 trillion economy, the ruling Hindu nationalist Bharatiya Janata Party (BJP) received 37.6 percent of the national vote share in the 2019 general elections. It emerged as the single largest party in the country for the second consecutive time. The BJP won 303 seats and received more than 50 percent of the votes polled for 224 constituencies.

Modi’s resounding mandate was delivered to boost economic growth by making the country more investor-friendly, continuing the project of revitalizing industry and infrastructure in the country, ironing out the kinks in the implementation of the goods and services taxes (GST), and making up for disastrous policy decisions, such as demonetization, through job creation incentives and tax breaks for small businesses.

Thus far, the prime minister appears to hold a mixed record on all fronts.

His economic performance has lagged, with key data showing a steeper decline in GDP growth than was initially thought to be the case. More disturbing has been a trend towards political adventurism that has accompanied an equally reviled and touted campaign strategy using social and religious identity to extend the BJP party’s footprint across more Indian states.

How Modi reconciles the concerns of the country’s business community and investors with the polarizing agenda of many in his political party will determine if this second term amounts to his undoing or not.

Foreign investors on their part will be closely tracking Modi’s performance on his reforms’ agenda.

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Of major interest is the much promised labor reforms as rigid compliances enumerated in multiple laws and based on overlapping jurisdictions often stop foreign companies from expanding their operations in India. Another key concern is land reform; if land acquisition becomes easier, it will speed up the process for setting up factories, industrial plants, and office parks. Prospective foreign investors will also be looking for stability in tariff and tax structures.

Corporate tax rates slashed but more stimulus expected

In early 2019, India’s GDP growth rate looked promising. However, by the second half of the year, the projections were revised to less than five percent. Several credit agencies including Fitch, World Bank, the IMF, and the ADB downgraded India’s FY20 growth rates. In November 2019, Moody’s Investor Services cut India’s ratings outlook from stable to negative.

According to a State Bank of India (SBI) report, the revision of growth rates is attributed to “low automobile sales, deceleration in air traffic movements, flattening of core sector growth, and declining investment in construction and infrastructure.” Another reason for slow growth rate was excessive rainfall, which negatively impacted agricultural growth.

On the verge of an endemic economic slowdown, the government, in September, decided to cut corporate taxes to attract continued foreign investment, encourage job creation, and support the struggling domestic manufacturing sector.

This was the single largest reduction in India’s corporate income tax rate in almost three decades.

For existing companies, the base corporate tax was reduced to 22 percent from 30 percent, and for new manufacturing firms the rate was cut to 15 percent from 25 percent.

By bringing the country at par with major global economies on the taxation front, and at more competitive rates when compared with regional rivals, India is making clear its intentions to become a base for investors in Asia and companies looking to diversify their China operations affected by the trade war.

Critics are, however, more skeptical. For instance, will the tax actually revive growth beyond the initial boost to investor sentiment? Either way, businesses will be looking for a more compelling stimulus to tide over the current slump.

According to a Bloomberg survey report, 37 percent of their respondents cited capital controls as the greatest barrier to accessing India’s financial markets. Further, they cited that frequently changing rules was one of the most frustrating aspects of investing in India. They also hoped that the government would scrap the capital gains tax, liberalize central bank norms, and abolish the need for licenses to start bond investment.

The government will do well to listen to these concerns, ahead of the budget roll-out for 2020-21 in early February.

Ease of doing business improvements should apply across country

This year India moved up 14 places to rank 63 (out of 190 countries) on the World Bank’s Ease of Doing Business index. For a third year in a row, India was featured in the list of the top 10 countries that improved the most on the ease of doing business front. India’s rise in the index was due to the following reforms:

• Fees abolished for the company incorporation form (SPICe) and the electronic format of memorandum of association and articles of association making it easier to start a business;
• The construction and building permit process streamlined to be less expensive and time consuming;
• Trading across borders made easier by enabling post-clearance audits and integrating trade stakeholders onto a single electronic platform;
• Resolving insolvency made easier by promoting reorganization proceedings in practice.

In spite of the improvements shown in the rankings, India still performed poorly in several parameters, including registering property (154), starting a business (136), paying taxes (115), and enforcing contracts (163).

It should note that only Delhi, Mumbai, Kolkata, and Bengaluru are included in the surveys that form the basis of the World Bank’s report.

On the ground, the states of Gujarat, Maharashtra, Karnataka, Andhra Pradesh, and Tamil Nadu are the top five performing states in India, based on their contribution to the national GDP.

Slightly different in its estimation, the National Council for Applied and Economic Research (NCAER) 2018 State Investment Potential Index (N-SIPI) identifies Delhi, Tamil Nadu, Gujarat, Haryana, and Maharashtra as the most investment-friendly destinations in India. The NCAER uses a perceptions-based survey to rank the competitiveness of Indian states’ business environment on six pillars – land, labor, infrastructure, economic climate, political stability and governance, and business perceptions.

According to the survey, in terms of the economic climate, Delhi, Telangana, and Gujarat are the top three states. In case of infrastructure, Delhi, Punjab, and Haryana are leading performers. For governance and political stability, the top three spots are occupied by Tamil Nadu, Haryana, and Punjab. For procuring labor, Tamil Nadu, Andhra Pradesh, and Telangana have been ranked as the top states. When it comes to overall ranking, Gujarat, Maharashtra, and Tamil Nadu each present a strong business case.

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It is therefore important that foreign investors seek local advice to support insights derived from macro reports. India is a highly diverse and differentiated market and investors should make their decisions based on how each state caters to their respective industry and what are the regional tax and regulatory incentives.

Resolving insolvency to become easier with legal changes introduced

India improved significantly on resolving insolvency – the country jumped 56 places to rank 52 on the World Bank’s Ease of Doing Business index in this category of assessment.

In August 2016, the Insolvency and Bankruptcy Code (IBC) was implemented to protect investors and make the process of doing business in India simpler. Further, a second bill titled Insolvency and Bankruptcy Code (Second Amendment) was introduced in the parliament in in December 2019, to streamline the corporate insolvency resolution process. This bill has been approved by the prime minister’s cabinet and is expected to be passed in parliament.

The amended Code directs the courts to ensure timely conclusion of cases, affords greater flexibility for corporate restructuring to maximize the value of assets, and prioritizes the interests of secured creditors. For the real estate sector, insolvency can only be initiated if 10 percent or 100 homebuyers, whichever is lower, or debenture holders agree to the move. No single homebuyer can approach the National Company Law Tribunal (NCLT) to invoke IBC provisions under this amended code.

By providing a time-bound process for resolving insolvency, India hopes to provide a more transparent and reliable business environment for foreign investors.

The following amendments have been introduced to the IBC:

• Permits, licenses, and registration will not be terminated on the grounds of insolvency;
• Minimum threshold (for a certain class of financial creditors) for initiating the bankruptcy resolution process;
• Corporate debtors to be allowed to initiate resolution process against any other corporate debtor;
• Liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease; and,
• Restrictions on certain corporate debtors from making an application to initiate the resolution process.

What investors expect from India in 2020

With a cut in the growth forecast, and ongoing economic slowdown, India’s path to economic recovery will be challenging. Experts specify that India needs policy-based reforms especially focused around land and labor. Specifically, foreign investors are looking at the government to make it easier and less expensive for companies to acquire land. They are also looking for more flexibility when it comes to hiring workforce.

The government is already working towards these reforms, and is assimilating 44 labor laws into four major codes – wages; industrial relations; social security; and safety, health and working conditions. When these four codes will become law, it will simplify registration and compliances for businesses which has been major sticking point for foreign companies.

More sectors in India are now liberalized and the government remains committed to creating a favorable ecosystem for foreign investors. The services, computer software and hardware, and telecommunications are the largest sectors for FDI equity inflow in India and trends show this will continue to be the case. The challenge for the government, therefore, is attracting investments into its industrial and manufacturing sector for which economic reforms are essential.

As the US-China trade war continues, it will open up opportunities for India as more companies look to geographically derisk their Asia operations. To take advantage, India must address its infrastructure weaknesses and streamline regulatory requirements – policy decisions in 2020 will be key in this regard. Business plan for the long-term and any uncertainty or reactionary moves to protect domestic competition will dissuade foreign investors. This will be essential as India works towards playing a bigger role in the global supply chain.

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