While India’s stock market surge in late May 2014, following the election of Narendra Modi’s Hindu nationalist Bharatiya Janata Party (BJP) indicates that investor confidence is on the rebound, foreign investors are still expected to adopt a ‘wait and see’ approach when doing business in India, Indian professional services firm, SKP Group said in a recent report.
While growing business confidence in India propelled the Bombay Stock Exchange into the world’s top 10 largest stock markets by value for the first time in May, as the total market capitalisation of Indian companies jumped by 25% to $1430bn following pledges by India’s new prime minister that he would implement structural reforms to the Indian economy. A history of slow policy-making and an opaque tax authority continues to be the biggest challenge to boosting FDI into India, which has been declining since reaching a peak in 2009, according to SKP, which is part of the Nexia International network of independent accounting and consulting firms.
Unpredictable tax-related policies, including the retroactive decision by the tax authorities to impose a $2bn tax bill on the UK-based telecommunications provider Vodafone, and perceived policy paralysis relating to the former government’s handling of high-profile corruption scams, has caused FDI in India to fall by 30% since 2009. According to The fDi Report 2014, an annual review of greenfield FDI by fDi Intelligence, capital investment into India in 2013 almost halved compared to 2012, decreasing to $15.8bn.
Although the former Indian government implemented several changes to aid foreign investor access to the country’s capital markets – including the move in January 2014 by India’s Securities and Exchange Board to merge foreign institutional investors and qualified foreign investors into a single investment category, as well as the decision by the Reserve Bank of India in July 2014 to implement a new Income Tax Act – perceived policy paralysis in tackling high-profile corruption charges means investor confidence in the country remains low. According to SKP, FDI is increasingly shifting to neighbouring countries in Asia, as well as emerging markets in Africa, as investors wait and see which policies the new BJP government adopts following the election results in May 31, 2014.
Although corruption and an inefficient legal system continue to be the biggest obstacles cited by foreign investors doing business in India, and the former government’s decision to overturn India’s Supreme Court ruling which was in favour of not retroactively imposing a tax bill on Vodafone, significantly damaged India’s international reputation as an investment location, SKP Group predicted there could be an upsurge in stock market activity following India’s election results. If the new prime minister’s promises to tackle some of the structural constraints to doing business in India are implemented, India’s attractiveness as an investment destination could further improve.