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 have long griped about India’s byzantine rules and suffocating bureaucracy, but recent policy flip-flops have 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 measure seeks 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,” said Deepak Lalwani, chief of India-focused investment consultancy Lalcap.
“However, fresh capital will be fearful of the business and investment climate and will be hesitant to come,” he said, cautioning that poor investor sentiment “might dramatically slow future foreign capital.”
Already, gross foreign direct investment in India has fallen by a quarter to US$20.3 billion in the fiscal year that ended last month, down from US$27.1 billion the previous year, according to official figures.
In a letter to India Prime Minister 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 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.
Economic expansion for the last fiscal year is estimated to have been about 6.9 percent, 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 liberalize 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 of India canceled their licenses.
The court’s move stemmed from a scandal in which the government had issued mobile licenses in 2008 at throw-away prices, costing the public treasury up to US$39 billion, in what is believed to be India’s biggest graft case.
The license cancelation “was a shock for the foreign operators, especially as this was a ruling on a government policy decision,” said Kamlesh Bhatia, India research director at global consultancy Gartner.
In December last year, 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,” Indian Council on Global Relations head Manjeet Kripalani said.