The Pros and Cons of Investing in India

14 March 2018

Last month, Harvard Business Review published “Three Reasons Global Firms Should Keep Investing in India,” by Vijay Govindarajan, a distinguished professor at Dartmouth, and Ravi Venkatesan, the former chairman of Microsoft India. Given the authors’ bona fides, it’s not surprising the article makes a compelling case for investing in the world’s largest democracy.

They cite India’s increased spending on infrastructure, along with its emerging middle-class consumer market that has allowed some multinationals such as Honda and Samsung “to do spectacularly well in the middle of … [India’s] economic pyramid.” Most important, they say, is that India has “one of the richest tech startup innovation ecosystems in the world,” which has “attracted over $20 billion in the past three years.” The country’s talent pool, moreover, is well-educated, young and deep. India has an astounding 10,000 engineering institutes that each year pump out “more engineers than China and the US combined.”

As the article’s title suggests, Govindarajan and Venkatesan are basically preaching to the choir. A host of governments and multinationals have already firmly grasped the fact that India has enormous potential to generate investment returns. Last month, for example, Canadian Prime Minister Justin Trudeau visited Mumbai for the Canada-India Business Forum. According to CBC, he announced that “Canadian and Indian companies have signed 66 new contracts worth $1 billion,” and that Canadian companies will “invest $750 million in India.” Canada’s Global News quotes Kasi Rao of the Canada-India Business Council as saying of the forum, “In all my years in the Canada-India space, I have not seen that level of interest."

Interest is growing in France as well. French President Emmanual Macron recently finished a three-day tour of India in which he and Indian Prime Minister Narendra Modi “highlighted a strong alliance and cooperation in defense, security, technology, space and counterterrorism.” According to Reuters, Macron said last Thursday in an interview: “Your historical partner in Europe was the UK, and I want France to become the new partner. … I want France to become … [India’s] reference partner of the 21st century.”

Prime Minister Modi has also wooed Japanese officials. Japan’s government is providing the majority of funds for a $17 billion project to build a bullet train from Mumbai to Ahmedabad, a commercial city of over 5 million people. Last fall, Modi and Japanese Prime Minister Shinzo Abe laid the foundation stone of the project.

Other recent prominent investors in India include the country’s own expat community. CNN Money reports that over the last three years, “several prominent [Indian] businessmen” living in the United Arab Emirates are investing billions in ventures back home related to healthcare, solar power, infrastructure and more. Members of the UAE business community attribute the investments to Modi’s “business-friendly policies,” along with patriotism, favorable returns and India’s recent jump from 130 to 100 in the World Bank’s Ease of Doing Business rankings.

India's ambassador to the UAE, Navdeep Singh Suri, told CNN Money that he expects the trend to continue. If it does, it could profoundly affect India’s economy, since the UAE is home to the largest community of Indian expats, at more than 3 million. The article adds that the UAE government has also pledged $75 billion to improve India’s infrastructure, and that Emirates Airline has “just announced an agreement with Indian state Andhra Pradesh to help develop its aviation sector.”

Modi’s government took office in 2014 and as the above examples hint it has taken some effective steps to reduce red tape and improve the country’s reputation among foreign investors. These efforts include implementing a new eBiz platform to facilitate business registration, simplifying the import-export process and implementing new employer-friendly laws. Last year, India’s lawmakers also made it easier for non-residents to obtain an Indian tax registration and, as Simran Juneja wrote for our blog, “voted to replace its labyrinth of confusing, overlapping federal and state taxes with a single tax on goods and services.” In a particularly bold and unexpected move, Modi also unilaterally implemented a demonetization plan to shift India away from a cash-based economy that enables corruption and tax noncompliance.

In a recent IMF News interview, IMF mission chief for India Paul Cashin acknowledges that Modi’s government “has made significant progress on important economic reforms, which will support strong and sustainable growth going forward.” He cautions, however, that “challenges remain” and that “there is little scope for complacency.”

Persistent problems include low productivity in India’s vast agricultural sector, sluggish employment growth, a low (25 percent) participation by women in the labor force, and a lack of progress in improving health, nutrition and sanitation. Social-political concerns are of particular interest to certain Western democracies looking to invest in India. The Financial Post notes, for example, that on Trudeau’s recent India visit, the Canadian prime minister hosted a round table with women business leaders and otherwise tried “to push some of his domestic political priorities in India, including women’s empowerment and human rights.”

Trudeau’s agenda speaks to another persistent challenge for India when trying to attract foreign investors: cultural differences and misunderstandings. Akash Sahai, who operates a blockchain business in both Canada and India, told Global News, “Businesses in Canada … have looked at India as perhaps too difficult, and too foreign and maybe [as] a myth.”

These kinds of cultural clashes, and other challenges, have affected the bullet-train initiative. A spokesman for the India-based National High Speed Rail Corporation told Reuters, “The Japanese have reservations on certain issues because they have a concern that there is a difference in the culture and systems of Japan from the culture and systems in India.” In addition to this conflict, the article notes that “Japanese steel and engineering companies are in the driver’s seat to bag major supply contracts,” which undercuts Modi’s own economic strategy of promoting India-manufactured goods. Despite these and other misgivings on both sides, though, the bullet-train project has been fast-tracked and is scheduled to be completed by August 2022.

India’s biggest and most persistent economic challenges are summed up by Binay Shetty, CEO of the UAE-based BRS Ventures, who told CNN Money: “We've always been hesitant to invest in India just because the bureaucracy was too much and corruption was too much.” While Prime Minister Modi is making significant strides in reducing red tape, it’s worth pointing out that rising from 130 to 100 in the World Bank’s Ease of Doing Business rankings is hardly cause for resting on one’s laurels.

Of greater concern perhaps is India’s reputation for corruption. The country ranks an unimpressive 81 in Transparency International’s Corruption Perceptions Index, and that standing isn’t likely to improve soon. A Bloomberg article says that “a string of corporate scandals are … in Indian headlines right now,” and the allegations of corporate fraud “are a blow for a nation fighting to shed its reputation for entrenched corruption and win the confidence of global investors.”

The most prominent scandal involves jewelry magnate Nirav Modi (no relation to the prime minister) and his uncle Mehul Choksi, who controls another jewelry group. Punjab National Bank has accused the two of using fraudulent guarantees worth $2 billion to secure credit from foreign lenders. Reuters says it may be the “biggest bank fraud in Indian history,” and that it throws light on an “opaque business culture dominated by powerful families — known in Indian business parlance as ‘promoters’ — and the absence of controls to rein them in.” The jewelry scandal is international news — Nirav Modi has counted Hollywood stars such as Kate Winslet and Viola Davis as clients — and a serious setback for Prime Minister Modi, who has promised to curtail corruption.

Even given these persistent problems and uncertainties, India will likely continue to entice major investors in the coming years. The IMF’s Cashin says that India “remains a bright spot in the global landscape.” His organization predicts India’s medium-term growth will rise to over 8 percent, thanks in part to its new goods and services tax.

That remarkable prediction for growth will no doubt please Prime Minister Modi, as will the words of his ambassador to the UEA, who told CNN Money of investing in India: “We've really [only] scratched the surface. … as returns weaken in Western markets, India — with its combination of growth, scale and stability — is a very attractive opportunity.” The writers of the Harvard Business Review article put it even more strongly: “India is a paradox: mega opportunities and mega headaches. … if a company can overcome the challenges, the prize is huge.”