A market in New Delhi, India, on April 26, 2023（XINHUA）
India, with its vast population exceeding 1.4 billion, has seemingly emerged as an attractive market for foreign investors, especially those from the West. The country’s impressive GDP growth rate, surpassing 7 percent in recent consecutive years, has fueled optimism about its economic potential.
Much of this enthusiasm, however, stems from Western efforts to position India as an alternative to China’s dominance in global supply chains across sectors, including goods, services, industry and technology. It would appear that at the core of this strategy lies the West’s broader geopolitical objective of establishing India as a counterbalance to China.
Many analysts thus believe that India’s optimistic economic outlook may only be skin deep, masking the underlying pitfalls behind a deceptive façade. A huge population with limited capacity, skills and knowhow, living in abject poverty may actually be a bane, rather than a blessing. A relatively high GDP growth rate indicates an underdeveloped economy, as developed countries rarely see growth rates exceeding 6 percent.
Re(al)location
The United States has nudged many major private sector manufacturers, including U.S. giants like Tesla and Apple, to shift their operations from China to India. Other big, medium and small companies are now following suit in a bid to grow India’s role in the global supply chain. This move is also partly driven by substantial tariff hikes on exports from China to the U.S., propelling a broader reallocation of production capacities. Nonetheless, as this movement is driven by external policies rather than organic growth, it comes with certain limitations, something U.S. policymakers and industry experts have admitted to.
Tesla owner Elon Musk postponed his visit to India and a meeting with Prime Minister Narendra Modi in April, owing to the slow or lack of response from the Indian side to his project inquiries. Subsequently, Musk’s team stopped following up on these inquiries, dampening the hopes of Tesla’s relocation to India. Tech giant Apple, which started manufacturing iPhones in India in 2017, faced enormous labor troubles and quality control issues owing to infrastructural confines and regulatory hurdles. It therefore comes as no surprise that Association of Southeast Asian Nations (ASEAN) countries have received more relocations from China than India. Several German companies, for example, are choosing Japan over India for relocation, despite the former being much more expensive.
Though the U.S. expects to see a rise in the Indian demand for equipment and services in energy, environment, healthcare, technology, infrastructure, transportation and defense in the coming years, challenges remain in obtaining a conducive business environment. Other countries, including Australia, Japan and several European nations, are also grappling with similar challenges. As a result, India’s foreign direct investment fell in 2023-24, with a year-on-year disinvestment of 29 percent.
Regulation
Foreign businesses and investors in India frequently face opaque and interpretable tariff regulations. In addition, certain sectors offer limited market access to foreign goods and services. Indian customs authorities are notorious for demanding avoidable documentation, frequently resulting in prolonged processing delays. India imposes the highest average applied tariff of any Group of 20 nation and has some of the highest bound tariff rates among World Trade Organization (WTO) members. Its average Most-Favored-Nation (MFN) applied tariff rate, or tariff rates a country applies to imports from trading partners that are WTO members, stands at 18.3 percent, higher than that of any other major economy. India’s maximum MFN tariff rates on agricultural products have an average of 113.1 percent and reach up to 300 percent in certain cases, making these among the highest globally.
India further applies a wide range of border charges and fees using different tariff lines based on the organic or inorganic nature of the product and its ingredients, as well as its animal- or plant-based origin. It has also created barriers for certain products such as import bans, import permit requirements and tariff-rate quotas only allowed to government monopolies.
The country’s infrastructure is dilapidated in many areas and, at times, even newly-built or refurbished structures are falling apart. Several airports, bridges, roads and buildings constructed during the one decade of Prime Minister Modi’s rule have either collapsed or developed major faults. These include the new parliament building inaugurated with much fanfare in May 2023 and at least 14 bridges in Modi’s home state of Gujarat. Earlier, even during the Congress-led coalition government, the Commonwealth Games held in New Delhi in October 2010 garnered greater attention and notoriety owing to the collapsing facilities built for the events rather than the games.
Revalidation
Several countries remain wary of India’s weak intellectual property (IP) and copyright protections, especially in terms of practical enforcement. Many ongoing IP issues between the U.S. and India have not seen any substantial progress. India continues to be listed among the Notorious Markets for Counterfeiting and Piracy, a list of online and physical markets that supposedly engage in or facilitate trademark forging or copyright piracy.
A very basic issue in this regard is India’s limited capacity to absorb investment. Political meddling in a purely economic decision-making process is endemic. Many a sound economic project is sacrificed at the altar of personal or partisan expediency. India doesn’t have the working speed, adoptable labor force or infrastructure necessary to reach the next level.
India habitually makes impractical demands for technology transfer from manufacturers utilizing advanced and cutting-edge expertise. It seems to show little respect for the amount of intellectual effort and financial investment a foreign nation puts in to achieving technological knowhow, which cannot be squandered on uncertain market access. India’s track record in foreign joint ventures is also questionable as local investors give undue weightage to land ownership and inflate their investment components. Domestic regulators and arbitrators often favor the local partner over the foreign one. Many foreign owners therefore choose to leave, disposing of their shares at low prices.
India’s visa regime can pose challenges for foreign visitors. Any discrepancy in the category of visa and engagements during the visit can lead to deportation. Additionally, visa regulations can change with little notice. The system also tends to discriminate against naturalized foreign citizens, often causing delays in their visa processing depending on the applicant’s country of origin. In some cases, visas are neither issued nor denied outright, leaving their applicants in limbo. This creates a staffing challenge for foreign companies preferring to hire employees based on merit rather than racial background.
Realization
Among its major foreign investors, India’s treatment of China has by far been the worst. Chinese social media apps like Weixin, known internationally as WeChat, and TikTok, owned by Beijing-based tech mammoth Bytedance, were banned over trumped-up allegations. Technology companies Huawei and ZTE, then, are sanctioned from participating in contracts providing services to airports, seaports and 5G telecommunications.
Similarly, Chinese car manufacturers such as BYD and Great Wall, as well as mobile phone manufacturer Xiaomi, have had to bear the brunt of regulatory denials and heavy fines. The typical Indian modus operandi has been to allow Chinese businesses to bring in their investment, set up offices, build plants, and so on. Once production starts, or is about to kick off, the government subsequently starts imposing bans, restrictions and fines. Though the arbitrarily banned, restricted or penalized Chinese companies in India run in the hundreds, another 15 major Chinese companies were banned from doing business in the country this February.
Interestingly, however, in August, India displayed a tactical shift by approving the investment proposals submitted by many Chinese companies and removing restrictions on others. Many India watchers believe that this move is geared toward gaining Chinese support for the Indian bid for a permanent seat on the United Nations Security Council and is likely to be reversed in due course. Simultaneously, many analysts also believe that the hub of cutting-edge commercial technology is situated in China, and the U.S. and its allies simply cannot provide this type of advanced tech.
For the sake of gaining access to these technologies, the country has opted to make a tactical retreat. This also suits its Western patrons, who can now also obtain these technologies through India.
In conclusion, India offers a challenging, tough economic milieu to foreign businesses. And in certain cases, its severity may become unbearable. If India wants to realize its developmental ambitions, it will need to revisit its business environment with good intent, all the while aligning with the short and long-term interests of the foreign investors.
The author is editor-in-chief of The Daily Mail Pakistan
Copyedited by Elsbeth van Paridon
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