As Modi turns to Europe, India’s FDI disappointments are all homemade

As Modi turns to Europe, India’s FDI disappointments are all homemade

Under PM Narendra Modi, India has pursued a policy of opening up its huge market to FDI in recent years in order to benefit from the cash, technology and best practices that will push its development further as it seeks to become a global powerhouse. Concluding a trade and investment agreement between the EU and India would undoubtedly be a boon to the latter, and both Brussels and New Delhi reiterated how firmly committed they are to finding a deal at a recent meeting between Modi and Belgian PM Charles Michel.

Yet it is clear that, of the two parties in the negotiations, India is the more pressed for time. After all, the EU is India’s biggest trading partner and the fact that negotiations on the agreement have long been at a virtual standstill is one of Modi’s major failings as Indian PM. The loss in trade is also bad news for India’s economy, whose oft-praised momentum is now slowly petering out.

Modi has admittedly taken significant steps to opening up India’s vast markets to FDI, including removing a surcharge on foreign investor portfolios and recapitalizing public sector banks. Modi claims these measures have been successful at luring overseas investors– but the rosy picture painted by the PM doesn’t tell the whole story.

FDI inflows only tell half the tale

The Indian government was quick to exalt a record high of $64.37 billion in FDI in the year ending March 2019, making a total of $286 billion over the last five years. The problem, however, is that FDI on the whole has been falling. The reason behind this overall drop in foreign investment is less than flattering for Modi: the government’s arbitrary behaviour with regards to overseas firms has served to undermine its reputation on the global stage and damaged the country’s investment environment.

Consequently, annual growth in FDI equity inflows has stalled following its peak in 2008-09. FDI has dropped into single digits since 2016-17 and suffered negative growth last year for the first time since 2012. In 2018-19, it fell by 1.1 percent to $44.4 billion, with the telecommunications and pharmaceutical sectors experiencing particularly troubling declines of 56 percent and 74 percent, respectively. It is clear that in order to attract FDI, the government needs to take the next step by backing up the words of its legislation with the actions of its government – actions that should strike foreign investors as fair and reasonable.

Actions speak louder than words

But this is precisely where India has been lacking. Despite the encouraging noises coming out of New Delhi, India is still not viewed as a prime investment destination by international firms due to the ways in which it has mistreated them in the past. Specifically, Modi’s government has engaged in behaviour that could be construed as arbitrary at best and discriminatory at worst, expropriating assets of overseas companies and prosecuting them on alleged non-payment of taxes. On multiple occasions, independent adjudicators have found in favour of the foreign enterprise.

One of the most prominent examples of such treatment is British telecoms giant Vodafone. India is continuing to attempt to retroactively collect $5 billion in taxes on Vodafone’s acquisition of Hutchison Whampoa’s Indian interests, despite the deal itself having taken place in Hong Kong. After the Supreme Court dismissed New Delhi’s claims on exactly those grounds in 2012, the Indian government rushed through a new law “clarifying” that transactions of this nature were indeed taxable – including retroactively. An independent arbitration tribunal began proceedings earlier this year over the potential illegality of the move.

The rapid change to India’s tax law may have tremendous consequences for a variety of cases in which international firms are pitched against the Indian state, including AT&T, E*Trade, General Electric and SABMiller. Brussels has surely taken note of the problems these firms are running into—at a time when Modi is hoping for positive signals from the EU regarding the trade agreement.

Nor are European firms alone in facing difficulties with their Indian investments. Japanese car manufacturer Nissan was forced to haul the Indian government in front of the Singaporean Supreme Court after non-payment of tax breaks and other incentives that a previous administration had promised the firm in 2008. After investing upwards of $860 million into a Chennai factory and creating 40,000 jobs, Nissan claimed they were short-changed by as much as $410 million in unpaid incentives and a further $300 million in damages, interest and other costs. Fortunately, an end to the row appears to be in sight, though the injury to India’s reputation has already been wrought.

Another notable example is the 2003 case of the Dabhol Power Project, in which India was ordered to pay $28.57 million to both Bechtel and GE after New Delhi was found to have improperly expropriated their interests in the Indian energy venture. These are far from isolated incidents, either. At present, there are more than 20 international arbitration proceedings in which New Delhi has become embroiled – among the highest figure brought against any nation anywhere in the world.

Economic revitalisation will take more than lip-service

While the Prime Minister’s efforts to open up the national floodgates to FDI should be commended, it will take more than legislative promises to turn around his country’s fiscal fortunes. Abandoning petty court cases which focus solely on short-term gain at the expense of long-term standing (and more than often than not end up losing both) should be the first step in making his country more attractive to overseas interests.

Furthermore, Modi could also benefit by taking a leaf out of the books of the ASEAN region, which has cumulatively enjoyed a threefold FDI increase in 2019. Producing more coherent, fair and predictable policy would certainly be viewed as a sign of goodwill among India’s European partners and help incentivize new negotiations between the blocs. If European investors are to have confidence investing in India, Prime Minister Modi’s government needs to ensure that the rule of law is enforced and that legally binding contracts are honoured. If India can curtail its own contradictory behaviour, there is no reason why it can’t turn its FDI false dawn into the authentic emergence of a new global powerhouse.

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