India welcomes foreign companies, but is the nation ready for them?

By Annie Gowen

Arun Jaitley, India's finance minister. Photo / Bloomberg
Arun Jaitley, India's finance minister. Photo / Bloomberg

If there was one message that Indian Prime Minister Narendra Modi wanted to send to the world last week, it's that there are big investment opportunities in India.

At a flashy week-long event in India's commercial capital, the government showcased the country's business potential to more than 10,000 foreign and domestic companies and more than 65,000 attendees, garnering in excess of $227 billion in pledges by week's end, organizers of the "Make in India" promotion said.

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Modi - the event's visionary and his country's cheerleader in chief - called it the "biggest multi-sector event" ever held in India, and he said that Make in India had become the "biggest brand India has ever created." With all the rhetoric on display, wags on social media dubbed a fire that broke out on the event's main stage Monday night "the Bonfire of the Vanities." (No one was injured in the blaze.)

Chief executives, business owners and entrepreneurs in Mumbai last week said they remain optimistic about India and Modi, who swept to power in May 2014 with promises to transform his country and pull its economy out of the doldrums.

The U.S.-India Business Council, for example, said its American members will invest $27 billion in India this year and the next, beyond the $15 billion invested since Modi assumed office.

Yet they continued to voice the common refrain that much work is needed before the country can increase the manufacturing share of its service-oriented economy to the program's goal of 25 percent, including creating a skilled workforce as well as taxation and labor reform. Modi last week made much of India's recent jump of "12 places" on the World Bank's "Ease of Doing Business" index, but it is still 130th out of 189 countries, below Russia and Iran.

"I think expectations have to be met," Agrawala said. "It can't be incremental change. We haven't seen the major changes yet."

The message is that India is open for business, and that is coming across loud and clear.
Banmali Agrawala, CEO of GE South Asia

GE's transportation division was recently awarded a $2.6 billion contract from Indian Railways to make 1,000 diesel locomotives in the eastern state of Bihar. Yet the government's taxation system is still unpredictable, he said. A new 7 percent tariff on imported medical equipment came as a surprise.

"Don't do this overnight; give us notice," Agrawala said. "If you unleash something like this overnight, it disrupts the supply chain and everything else."

A 2012 amendment to the income tax act that permits the government to tax foreign companies retroactively on capital gains remains on the books and continues to unnerve foreign investors.

"On tax issues there were concerns, but the prime minister and the finance minister [Arun Jaitley] have said there will be no retrospective taxation," said Amitabh Kant, the secretary of India's Department of Industrial Policy and Promotion. "They've stated very clearly that there will be predictability and consistency in the tax policy."

Yet this past week, the international telecommunications company Vodafone said it received a $2.1 billion tax bill on a pending case where the previous government had retroactively moved to tax capital gains from a 2007 acquisition of an Indian telecom business.

On tax issues there were concerns, but the prime minister and the finance minister [Arun Jaitley] have said there will be no retrospective taxation.

Then Vodafone said in a statement that in a week in which Modi was promoting a "tax-friendly" environment, "this seems to be a complete disconnect" between the government and its own tax department.

"We were surprised by that, so it is a concern," said Mukesh Aghi, president of the U.S.-India Business Council. "All I can say is we're encouraging the government to be more transparent and more predictable, so that it's easier for investment to come in and so companies can set up shops here."

The council inaugurated the first of two business incubators for American companies in India on Thursday.

In some ways, the grand Make in India event - with exhibitors and events spread over 20 halls in a Mumbai convention complex - was an outsize version of what Modi did for years as chief minister of the western state of Gujarat, where he made his name as a business-friendly politician capable of attracting foreign investors such as automaker Ford.

Despite the hoopla, the Indian business journal Mint said Thursday, it is unclear whether the investment pledges will come to fruition. Only about 8 percent of investment commitments made during Modi's tenure as chief minister of Gujarat were implemented, according to the state's Directorate of Economics and Statistics, Mint noted.

Aviation giant Boeing is one of two companies - Lockheed Martin is the other - hoping to strike a deal to build fighter jets in the country as part of the Make in India initiative.

Pratyush Kumar, president of Boeing India, said the company remains "bullish" on India and praised the Modi government's decision to approve deals that had been pending for years - which paved the way for a Boeing manufacturing plant to be built in the city of Nagpur. But more needs to be done in the defense sector, he said, particularly in challenging Indian regulations that require overseas defense companies to offset 30 percent of the value of contracts with locally sourced components or systems, manufacturing centers or skills training.

"There's still a long way to go," Kumar said.

- Washington Post

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