Illustration: Luo Xuan/GT
India's relatively stable political environment, sustained economic growth momentum, huge population dividend and cheap labor costs have attracted numerous international investors.
A survey by the Japan Bank for International Cooperation (JBIC) of 1,000 Japanese manufacturers in July 2014 found that India ranked the most preferred destination for future investment, followed by Indonesia (No.2) and China (No.3). Data from the US Department of the Treasury showed that India held 1.8 percent of US foreign equity holdings as of the end of 2015, compared with China's 1.6 percent of holdings.
In 2015, China's direct investment to India soared to $870 million, six times than in 2014 and double the accumulative investment to India in the past 15 years. However, India was not among the 13 countries which received direct investment from China exceeding $1 billion in 2015 and China's investment in India only accounted for 2.2 percent of the total $39.3 billion foreign direct investment received by India in 2015.
This year, Chinese firms are keen on cracking the Indian market, a trend that is expected to gain traction. In the first half of the year, Chinese companies including Wanda, SANY Heavy Industry, Xiaomi and Ctrip announced plans to invest in India. It has even become a trend for Chinese investors to travel in groups to India to explore investment possibilities in the country. In August 2015, Alibaba together with Foxconn, SoftBank and other partners invested $500 million in the Indian e-commerce platform Snapdeal. So far, China's Baidu, Alibaba, and Tencent (collectively called the BAT) have all shown strong interest in the Indian market.
With increasingly more Chinese firms and investors casting their eyes to India, it is urgent to rationally assess the political and economic risks of investing in India. Some observers believe that investment risks will arise due to obstruction from the Indian government, restraint in local investment environment or from the general characteristics of Chinese products and brands. Others suggest India's stance toward China, territorial disputes between the two countries and different strategic goals will throw uncertainty into investment in India. While taking the above factors into account, Chinese firms should become more knowledgeable about Indian laws and regulations.
First and foremost, they should acquaint themselves with the foreign investment rules established by the Indian central government as well as by individual state governments. Given the differences in each individual state in terms of development, religion, language and culture, land use rules, environmental protection laws and taxation policy investors will find it necessary to understand local laws, regulations and policies.
Second, Chinese investors need to understand India's tax system in order to safeguard their own interest. A myriad of federal, state and interstate tax levies in India create complicated logistics within the country and increased burdens on investors. Although India's upper house of parliament approved a reform plan to create a national unified sales tax in August, the details on how the tax will be levied and when the new tax system will be in place are still unclear. It is essential for Chinese investors to understand any particularities of the India's tax system in order to protect their own interest.
Third, Chinese investors should keep a close eye on the changes in Indian labor laws. Previously, India's labor law was regarded as one of the sternest and most complicated in the world. In 2012, a deadly labor dispute occurred at the Maruti Suzuki factory, a 50-50 joint venture between the Indian government and Suzuki, which suspended production for a month and delivered a serious setback to the company in more than $300 million in lost production. Prime Minister Narendra Modi has voiced the intention to amend the labor law to give firms more freedom to hire and sack employees. However, the plan has faced a number of hurdles so far, which will require Chinese firms to keep an eye out for any changes in the labor law.
Last, although India has a relatively sound legal system, implementation has always been a challenge. The efficiency of the Indian courts remains one of the worst in the world. More than 22 million cases are currently pending in India's district courts, another 4.5 million are waiting to be heard in the high courts while more than 60,000 await hearings in the supreme court, according to British newspaper The Guardian, citing the latest available government data. Chinese investors should consult legal professionals who are well-versed in Indian law. It is also important that firms cooperate with Indian legal experts in order to avoid risks.
India has undoubtedly become a promising country for investment, but it is also of utmost urgency that companies conduct prior risk analysis and assessment before any investments are made.
The author is vice director of the Institute of International Studies from Zhongnan University of Economics and Law. firstname.lastname@example.org