Doubts About Rule of Law Hamper India's Economy
The trade war between China and the United States is doing at least one nation good. It is the latest reason India has a chance to finally emerge as the economic powerhouse it should have been long ago.
Under Prime Minister Narenda Modi, India has whittled away at burdensome regulations, trimmed a stultifying bureaucracy, and reduced extreme poverty. Modi came to office in 2014 with a pro-growth platform, and he was elected to a second term earlier this year. Under his leadership, India has climbed up the rankings of the World Bank’s Doing Business Report, which measures whether a regulatory climate is conducive to starting and operating a business. India has moved from 134th to the 77th place in the ranking.
Most remarkable is that India, traditionally hewing to mercantilist policies to protect home-grown industries, has appeared to welcome outside capital. For the fiscal year ending March 31, $64 billion in foreign direct investment flowed into the country -- a record, and an increase of 42% over Modi’s first year in office.
India is benefiting from the U.S.-China trade war in two ways. First, tariffs are raising the prices of goods exported by India’s competitors. Second, global business leaders who worry about committing capital to China are looking to India instead. Still, those same leaders worry, with good reason, that India is an uncertain place to commit capital. The government isn’t following the rule of its own law.
Perhaps the most well-known worry involves Japan’s Nissan Motor, which in 2008 agreed to set up a giant plant in Tamil Nadu, a state in India’s southeast. Today, 40,000 employees produce 480,000 vehicles a year at the plant. (India is the fourth-largest auto manufacturer in the world after China, the United States, and Japan.)
Nissan claims that the Indian state owes $720 million in incentives that were part of the deal for opening the plant. The Permanent Court of Arbitration earlier this year rejected an Indian plea to dismiss the case, which was filed against Modi’s government in 2016. The dispute drags on.
If the Nissan claims were isolated, they would be less cause for alarm. But according to Reuters, “[t]he case is one of a string of arbitration proceedings against India by investors including Vodafone Group, Cairn Energy and Deutsche Telekom over issues ranging from retrospective taxation to payment disputes.”
In the Vodafone case, India is demanding $5 billion in taxes from a complex acquisition involving Hong Kong-based CK Hutchison Holdings. The Indian Supreme Court dismissed the tax claim in 2012, but the government introduced what the Financial Times called “a new law to ‘clarify’ that transactions of this nature were taxable -- with retrospective application to all cases from the previous 51 years. The move dismayed investors who complained that retroactive legislative changes would make India seem a dangerously unpredictable place to invest.”
Realizing the potential damage to future foreign investment, Modi promised that maneuvers like this would be a “thing of the past” under his government, but India is still pursuing Vodafone.
In another case, dating back to 2005, a company called Devas Multimedia, partly owned by Deutsche Telekom, claimed that Antrix, an Indian state-owned satellite company, breached a lease agreement for electromagnetic spectrum. DT won the case in two separate arbitration hearingsand in a later appeal before the Swiss Federal Tribunal. The case still hasn’t been resolved.
So long as India injects doubt into the most basic transactions, large multinational corporations will be reluctant to do business in the country. While India has swiftly climbed the ease-of-doing-business ladder under Modi, it still lags in one critical component of the index: enforcing contracts. In this category, India ranks 163rd, trailing every developed nation in the world as well as countries such as Honduras, Libya, and Zambia.
With trade wars raging, India has the potential to become an even stronger destination for FDI, but, as Bloomberg’s Andy Mukherjee writes, global investors still fear that they “could lose billions to policy fickleness.” India’s government has to give businesses the confidence that the law is the law for everyone, and that contracts will be honored. Until then, the real victims of lax enforcement will be India’s citizens, deprived of the jobs and the prosperity that they deserve.
James K. Glassman served as U.S. Under Secretary of State for Public Diplomacy. The views expressed are the author's own.