With the UK economy teetering on the brink of recession again, one can detect in some quarters a reaction, almost bordering on delight, that the so-called "Indian economic miracle" has suffered a few setbacks during the past few months.
It is true that the recent economic news from India has been disappointing. GDP is expected to fall to around seven per cent in the current financial year while inflation in December was 7.5 per cent. For a country with a population of more than 1.2 billion people, of whom approximately 350 to 400 million are regarded as living below the poverty line, these are worrying developments.
The Indian Government is taking steps to stimulate the economy by announcing an ambitious $35 billion infrastructure programme. Clearly, the government is hoping that this will encourage private sector expenditure as well.
One of the key ingredients in India's economic success has been inward investment. However, this has been adversely affected for a number of reasons. The general global economic slowdown has of course played a part, but other factors, such as the delay in opening up the multi-brand retail sector to foreign investment and the exposure of a number of corruption scandals, has undermined confidence in the ability of investors to conduct business in the country.
Foreign investors have also been discouraged by the long drawn-out dispute between the Indian tax authorities and Vodafone following the latter's purchase of a majority stake in the Hutchinson Essar mobile-telephone provider in 2007. However, the landmark decision of the Indian Supreme Court last month to dismiss a $2.9 billion tax claim against Vodafone is likely to provide much-needed certainty for investors. While one can understand the frustration of the Indian tax collectors at their inability to levy tax where an acquisition of an Indian business is structured through one or more offshore jurisdictions, it would not be conducive to facilitating foreign investment if legislation was introduced to reverse the judgment.
India remains an exciting place to do business
India remains an exciting place to do business. But, like other emerging markets, it faces challenges and so it is critical that the Indian Government continues to adopt policies which encourage inward investment.
