Foreign Investment Potential in India360°ANALYSIS
In this edition of The Interview, Fair Observer talks to Russell Stamets, a Delhi-based lawyer, author and business advisor.
Many foreign and domestic investors were jubilant when Narendra Modi became the new Indian prime minister in 2014. The upbeat market sentiment in India was expressed with a 27% rise in foreign direct investment (FDI) to $30.9 billion in fiscal year (FY) 2015. Foreign Institutional Investors (FII) have also poured money into India in FY 2015, with $17.9 billion specifically designated for Indian equities.
While the trend is positive, there are issues ranging from weak corporate earnings to high levels of non-performing assets (NPA) in banks—which is enough to cause jitters. Moreover, the government has come under scrutiny for trying to impose the minimum alternative tax (MAT), which could be applied retrospectively to firms; this could result in a large cost for companies and become a critical deterrent for foreign investment.
Nonetheless, the first year for the prime minister has resulted in a change of outlook. Modi garnered widespread interest for India with his extensive travels around the world, and he promised infrastructure investments to bolster the economy. According to a Times Now poll, 52% of the public believe that Modi has successfully tackled corruption, and 66% prefer him over his rival, Rahul Gandhi.
Modi is not without his detractors as many people at home and abroad have criticized the slow pace of reform. The above-mentioned poll found that 65% of the public noted the glacial pace of economic reform. The land acquisition bill (land bill) ordinance may allow India to unleash its potential, but it has met fierce resistance on account of the unfair treatment that farmers may face from corporations. The goods and services tax (GST) could finally pave the way for a proper tax regime between states and the central government. Investors are eagerly waiting for results on big issues such as the land bill and the GST. Modi says he does not want to disappoint.
In this edition of The Interview, Fair Observer speaks to Russell Stamets, a Delhi-based lawyer, author and business advisor, about foreign investment potential in India and how the government can entice others to invest in the country.
Daniel Currie: What do foreign investors look for before investing or building a business in India?
Russell Stamets: Investors do not look for anything different when analyzing India; they expect investment returns and strong growth. People look for growth potential before they invest in a business located in India. But investors look for the same set of metrics and fundamentals as they would do so in any other market, however, the expectations would vary depending on the market size.
It is noteworthy that some investors do not care about accounting and integrity issues when moving to developing countries. This line of thinking hurts them as they get embroiled in scams and corruption.
Private equity or venture capital firms are usually looking to invest or operate in an environment that showcases growth potential, and they also want to see firms that display a strong ethical foundation.
If direct investment is considered, then investors analyze the restrictions on the sector and general business climate—which could include onerous government regulation or heavy competition. These are some of the critical questions that investors look to answer before moving operations or funds into any country.
Currie: What do foreign investors expect from Prime Minister Modi for the next year?
Stamets: He needs to take realistic actions and showcase demonstrable advances on the ground. The last government was so bad, and so mired in confusion, that even a little forward motion and clarity is welcoming. But Modi needs to move forward, and there is every reason to think he will.
Currie: Is he being too idealistic when setting goals, considering that many will not be met?
Stamets: I think it is great that Modi is showing such ambition. Let me quote the Chicagoan architect Daniel Burnham: “Make no little plans; they have no magic to stir men’s blood.” You have to appreciate the enthusiasm and chutzpah he’s showing. But let me use a baseball metaphor for a cricket-crazy country: If you point to left field and promise a home run, then you better be ready to hit. Can Modi do more than talk about hitting? That part is not clear yet.
If he does do what is expected of him, then it will be a better place for everyone; it will help the whole world. As long as his measures provide clarity and guidance so that the factors of production can be organized to their best means, then there could be better times ahead for the Indian economy.
Currie: How will the interest rate cuts on June 2 by the governor of the Reserve Bank of India, Raghuram Rajan, affect the level of foreign investment over the upcoming months?
Stamets: Rajan is a hero to everyone who appreciates facts and logic. Of course he is going to do great things for India. He is practically from Chicago! His wife teaches law at the University of Chicago; a nice Chicago family, in short.
Nearly everything he does will invite more investment into India that will ultimately help the people. He is great for the country as he is competent and independent with his views, which makes it difficult for any Indian politician to ignore him.
Currie: What are the cultural specifics that investors look for when they move to India?
Stamets: I think people should focus less on any magical cultural understanding and more on listening to customers. General Motors Company (GM) has languished trying to sell cars that are badly adapted to the Indian market, while Hyundai has thrived by building awesome vehicles; the latter company has grown from a small startup to a market leader. It is not that the Hyundai employees were more polite than those from GM. When a company cares about the needs of its customer, wherever that customer is, then it is usually rewarded.
India is a great illustration of this, as Hyundai has outdone Tata in the car market. So tell me how much it matters that you have cultural insight? Listen to your customers, build a great product and you can succeed in India.
Currie: According to recent news, there has been some trepidation from foreign investors for a host of reasons. What should the government do in the short- and medium-term to allay the anxiousness felt by foreign investors?
Stamets: First, the government must acknowledge the validity of the anxiety rather than blaming the victims for expressing that sentiment. There is a deep lack of self-awareness at the highest levels of authority, coupled with a general indifference—not to mention corruption.
Much of the problem stems from the rapacious and capricious tax policy. Since the economy has not fulfilled its potential and generated tax revenue, the government has decided to extract money from foreign investors; if this activity stops, then the anxiety would improve overnight. The government’s approach to taxation is a short-term answer to funding national programs. With barely any confidence in their own growth plans, the Indian government looks for someone else to fund it.
Currie: What does India require more off: FDI or FII? Why or why not?
Stamets: India needs more investment. It is imperative to understand that in many important ways, India is not at all a poor country. But it is so far behind on so many significant needs that it could never fund all those necessities without massive foreign investment; it is a simple fact.
I would favor FDI because it is long-term, and it provides broader changes and improvements for the Indian people. FII requires the notion of “trickle down” economics to work. Nonetheless, both investments are required in huge amounts to meet the investment needs of the Indian economy. But without major clarity and sanity on tax policy, the Indian market will continue to see FII and FDI flee the country.
Currie: The government seems to have adopted a piecemeal approach when it is opening up the economy (defense and insurance) to foreign investors. Will this gradual approach reap better results for an Indian economy that is already notorious for reforming at a slow rate?
Stamets: India can—and should—move faster for its own sake. The country has taken a painfully slow approach to liberalization, but this has been helpful at times. The government needs to show that it is choosing its speed, however, by going faster when opportunity knocks. While opportunity presents itself, the country still moves at the same rate.
Currie: You mentioned in a post on the FCPA Blog that protectionist measures and corruption helped some businesses flourish during the License Raj. Has Modi been successful with his promise on a paradigm shift against corruption in business and politics?
Stamets: Modi has continued the trend toward accountability that has taken serious hold in the last five years. While there was a change taking place against routing corruption prior to Modi’s reign as prime minister, he can be credited with being part of the change. His tough stance on corruption is one of the qualities that brought him to his current role, and he is accelerating the change toward more transparency in politics and business. This is a big change, but Modi is riding an existing wave.
Currie: With your last post on the Aam Aadmi Party—that it has returned to the fore to tackle corruption. However, most governments try to tackle corruption. What needs to be done to give political parties staying power with a new generation of Indians coming to the ballot?
Stamets: Over the past ten years, the Indian population has intensified the pressure on politicians to produce results. At the very least, the government will have to pretend to do something for the people—this is a big development for India. Politicians are starting to care because they know that they have to perform or they will be voted out of power.
Currie: Can this ten-year development be attributed to the younger generation of Indians?
Stamets: It is not about age, but about attitude. Indians of all ages are taking a look at the world and deciding that their country can do better. If Indians can achieve so much working at the highest level of technology, finance and science in other countries, then why are the same results eluding its people in India? Everyone is asking that question and demanding an answer. We are seeing professionals of all ages take an interest in political action, and this is something the good “middle-class” people would have avoided before. The new engagement across the country is a real treasure and a reason to be excited for the future.
You should see the example of my dear friend R.K. Mishra, who runs the Indian Council for Public Private Partnership in Bangalore, who has spent the better part of the last decade making a real difference in the mess that has overtaken the otherwise beautiful city. As a leader, he has helped government work more closely and effectively with the private sector and local people. He is a great example of the new wave of practical activism undertaken by successful Indians who would otherwise have shunned politics a generation ago. It’s a spectacular social change.
Currie: What are the three biggest concerns for the economy going forward that Modi should solve?
Stamets: The great thing about India is it would take so little to really unlock its potential. The tragedy is that the government has simply refused to do this for so long. There are no mysteries on what would help India leap forward.
First, poor infrastructure is a constant drag on the country’s economic growth. There is general agreement on this.
This is followed by poor access to health care, which is compounded by a highly polluted environment. On average, Indians are shorter and have lower life expectancy relative to people in other countries; maternal health is poor, on average. Bangladesh, which is economically far behind India, has better quality of life achievements. India’s poor performance in health is a choice.
Personally, I think the third ingredient for growth is a simple willingness to face reality and to make hard choices. Modi must embrace a level of practicality to make a difference of the ground, and the Indian people have yet to see that take hold.
Currie: Modi has made an impact as he passed bills and traveled the world to attain investment for India. What has he done poorly since his time as prime minister?
Stamets: Nobody would accuse Modi of having a strong team behind him, and no one would accuse him of being too solicitous of the views of others, inside or outside of his government. Also, no one would accuse him of including too many South Indians in his inner circle.
Despite boasting strong leaders in finance and power, his political cabinet has too few bright spots to remove the feeling that this is a “one-man show.”
Currie: Many analysts have mentioned the importance of the contentious “land bill” in improving the ease of doing business and the country’s infrastructure. As a lawyer, does the removal of five categories (defense, rural infrastructure, affordable housing, industrial corridors and infrastructure projects) from attaining 80% consent from landowners, along with doing a social assessment, make much difference in the “ease of doing business?”
Stamets: The prime minister and his team have said they will continue to pursue clarification of the land bill despite any opposition. We need to change the way land is acquired if we are going to tackle the huge infrastructure problems in this country. Any progress on this front should be welcomed and respected because it does carry political risk. He is willing to fight for the bill, and it is welcoming to see.
Currie: Should Modi change the ordinances of the land bill in any way?
Stamets: The prime minister is taking a principled stance as he is learning how to fight national issues. Modi must show that the land bill creates immense value for the economy going forward. The opposition is completely unprincipled in this matter, except for the communists, who are principled but wrong.
Currie: On the whole, how has the government fared with the “ease of doing business” reforms in the country?
Stamets: Business is better, but it could hardly get any worse. The previous government threw unpredictable and unjust tax policies at the economy—income, corporate and the MAT—that can be blamed for eviscerating economic rationality and tarnishing its image as an honest trade partner. Nonetheless, the present government has done little to change the law. Finance Minister Arun Jaitley even defends the current system by asserting that India is not a tax haven. I can attest that no one in the history of mankind has accused India of being a tax haven.
Predictability and certainty are fundamentals to economic activity, but the Indian government continues to behave in an erratic fashion on taxation; with the promise of blaming anyone who points this out.
Currie: Does the reduction of corporate tax from 30% to 25% in four years not satisfy investors?
Stamets: It is not about rates, but how it changes. The government has been proven an untrustworthy partner to the private sector—especially with the Vodafone-Hutchison tax case. The irrational approach to taxation has naturally deterred foreign investors, but the government does not acknowledge this in any meaningful way. If I throw you in jail, promise you candy and tell you I will not do it again, will you believe me? The underlying economic growth has not returned, and the government is trying to finance its ambitions on the backs of foreign investors and the moneyed class in India, without really improving the general economic conditions. You can predict how that will turn out.
Currie: With the election in Bihar coming up, how can the government pass the land bill and keep a favorable outlook with farmers and poorer individuals?
Stamets: Hiding behind elections is one of the classic ways politicians have avoided making tough choices in India. I think the times and the electorate have changed and people are demanding better performance. There is plenty of good research showing that Indian politicians will adopt causes they think will help them at the ballot box. Who would have imagined ten years ago that so many politicians would be speaking out about corruption? The land bill is the same way—a strong politician will be able to sell this to the people.
Currie: With the amount of problems and protests that have taken place on the Land Bill, will we see the Goods and Services Tax (GST) bill passed in July 2015? What will it take to get this important bill passed?
Stamets: The GST is important because it is the most sophisticated discussion of center-state relations since Indira Gandhi’s period; this bill is an important and positive development for the maturing Indian democracy. All the important participants seem to have accepted that we will have GST; we are in the final lap on this.
This is a positive development for foreign firms that want to come to India. It may not simplify matters, but it will bind the country together in a more rational fashion.
Currie: With your extensive experience with the corporate legal sphere, what have you heard from business people and lawyers on the way the economy has been run?
Stamets: I can tell you without any reservation that this is the best time to invest in India in the last 20 years. We are at a great inflection point, but that does not mean India will succeed. The smartest along with the India-savvy people I know consider this the best opportunity any of [them] have seen and are likely to see for a very long time.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.