The US midterm elections showed that rhetoric aside, the economy matters. Cracks are visible in the western and Chinese economies. Capital has already started to flow back to Indian markets. However, what India needs is patient, long-term capital. Schemes like foreign currency non-resident (FCNR) deposits are a palliative measure at best. While they may attract short-term capital flows, these concessional swaps will cost the Reserve Bank of India (RBI). The solution is to attract long-term, stable foreign direct investment (FDI) and build exports.
To attract sustainable foreign investment, India needs clear rules and predictable outcomes across its legislative, executive and judicial institutions. Take the recent approval to disinvest IDBI Bank. It is India’s largest FDI in the financial sector and reinforces market confidence. Yet, in the same week, the Supreme Court dismissed appeals by YES Bank, RBI and the Union government, upholding the quashing of YES Bank’s Additional Tier-1 (AT1) bond write-off because the bank’s administrator had acted beyond their authority under the reconstruction framework. This demonstrates a lackof predictability and certainty for both debt and equity investors and, indeed, the financial system. SMBC Bank had invested substantial amounts in YES Bank. After Daichi and NTT Docomo, this is the third case of Japaneseinvestments impacted in India.
In the case of Tiger Global, the Supreme Court denied treaty relief despite the investors’ Mauritian tax-residency certificates, holding that the certificates did not preclude scrutiny for tax avoidance. This order rewrites the fundamental basis of tax treaties. It also shook investors’ understanding that grandfathered investments were protected. In March, the government amended the rules to clarify protection for income from transfers of investments made before April 2017.
{{/usCountry}}In the case of Tiger Global, the Supreme Court denied treaty relief despite the investors’ Mauritian tax-residency certificates, holding that the certificates did not preclude scrutiny for tax avoidance. This order rewrites the fundamental basis of tax treaties. It also shook investors’ understanding that grandfathered investments were protected. In March, the government amended the rules to clarify protection for income from transfers of investments made before April 2017.
{{/usCountry}}Aircel’s resolution plan had been cleared by its creditors and the National Company Law Tribunal (NCLT). Spectrum-use rights were recognised as intangible assets in the operators’ accounts. Yet the apex court held that spectrum could not be subjected to proceedings under the Insolvency and Bankruptcy Code.
Such moves have a chilling effect on FDI and foreign portfolio investment (FPI) in India. Collectively, the message investors get is that a position settled by one pillar of the State can be junked by another. Institutions created for a purpose lose effectiveness when they are superseded. We talk about the long pendency of cases in our judicial system, but the fact also is that collectively, the Union and state governments, and public sector undertakings (PSUs) are the biggest litigants. Nearly ₹30 lakh crore is tied up in various tax disputes.
Uncertainty is a risk, and it raises the discount on the return that firms expect when evaluating investments in India. Delays further compound the damage. When a question of law takes six to eight years to answer, this clouds decisions to invest in India. The following decisions are critical for restoring investor confidence.
First, attract 100 electronics and data centre companies to manufacture or set up units in India. The Apple instance shows what is possible: Smartphones are now a top export category for India. Global hyperscalers have made $200 billion in investment commitments. We are already a nation that is importing compute. We must not import the components for data centres. We must manufacture high-speed networking switches, AI server racks, storage systems, printed circuit boards, chassis, enclosures, and storage, compute and switch trays. Schemes must be designed specifically for such companies. This handholding is critical.
Second, overhaul the model bilateral investment treaty (BIT) framework. The 2015 framework severely stifled investor confidence. Importantly, the exhaustion of the local remedies clause must be reworked and brought in line with international standards. We must not overcorrect by shutting ourselves off from global capital in the name of protecting sovereignty.
Third, asset monetisation through real estate investment trusts (REITs) and Infrastructure Investment Trusts (InvITs) can attract a deep pool of global capital. The Securities and Exchange Board of India (Sebi)’s recent move to allow for Global Depositary Receipts (GDRs) to be issued against listed REITs and InvITs is an important first step. Expanding the pool of REITs to include data centres and government land will deepen markets. Exit rules and taxation rules must be clarified. The 20% cap on under-construction projects must be raised to allow capital to flow in at the construction stage.
Fourth, complete promised disinvestments and create a disinvestment pipeline. The 2021 Budget promise to privatise two public sector banks and one general insurance company, in addition to IDBI Bank, must be fulfilled. The same Budget announced a New Public Sector Enterprise Policy, calling for a bare minimum government presence in four strategic sector groups and privatisation or closure of commercial PSUs in non-strategic sectors. This must be implemented at the earliest. To start with, the disinvestment of The Ashok must be completed at the earliest. A hotel is not strategic, and the government has no business running a hospitality brand.
Fifth, tariffs on critical inputs must be brought down to zero. We must embrace competition and not hide behind quality control orders (QCOs). The digital trading experience in India must be seamless. Several separate government portals must be integrated at the backend. The full Customs Integrated System must be operationalised as soon as possible. Risk management must truly be risk-based. Authorised Economic Operators (AEOs) must evolve into a trusted-trader framework recognised by every agency. At the same time, we must not prescribe high levels of domestic value addition before scale. Insisting on high domestic value addition before firms achieve scale can discourage the investment needed to build that scale.
Finally, tax policy must align with international standards. Long-term capital gains tax (LTCG) should be removed for international investors. The securities transaction tax (STT) should be removed for all investors. In June of this year, a series of reforms were undertaken to strengthen FPI participation in G-Sec markets. A similar set of reforms to enhance participation in broader debt markets is necessary.
Fixing India’s issues needs making the law clear before capital is committed and resolving disputes swiftly thereafter. Policy predictability is the key. No number of reforms can compensate for its absence.
Amitabh Kant is chancellor, NIIT, former G20 Sherpa, and ex-CEO, NITI Aayog. The views expressed are personal