The first thing foreign investors tend to see when they look at India is just one man, Narendra Modi. He dominates the political narrative in India and is the country’s most pivotal politician since Jawaharlal Nehru. Indeed, Modi seems single-minded in his desire to destroy the Nehru-Gandhi dynasty as the country’s default ruling family and deliver a “Congress-mukt Bharat” (an India free of the Congress). Modi is on his way to achieving that, and in the process is also consolidating his position at the apex of Indian politics.
He has done so, seemingly, by weaponizing religion (in this case Hindu nationalism). But he has also married that with a transformative economic and regulatory policy agenda that has touched the lives of millions of Indians never previously part of the formal economy. This has also propelled the growth that makes India such an attractive market. For foreign investors this environment presents huge opportunities – and significant risks.
Let’s start with the risks – and some clarifications. Indian democracy is alive, but it is not well.
There is an attendant growth in reputational and operational risk for foreign companies as they sometimes fall foul of these Hindu nationalist positions in their statements and deeds. This can prompt boycott campaigns online, demonstrations at sites and even police and judicial action. This chauvinism is not static. Modi and the BJP are taking the agenda in a more radical direction – not because they must placate masses as some would have it – but because they genuinely believe in it. The likelihood of serious sectarian strife is growing, although the international response to Modi’s agenda has been to date muted – a trade-off for India’s participation in an anti-China collaboration led by the US with Japan and Australia.
Unfortunately, the BJP machine has also tried to tame the country’s mainstream media, elements of the judiciary, and state-level administrations. To deflect criticism on its policies, the BJP organisers have expertly wrapped Hindu nationalism around increasingly shrill monologues on everything from interfaith marriage to the welfare of cows to, most controversially, the status of minorities.
It is glib to say Modi has created a cult of personality for himself. Unlike other populists, he is very much a product of the ruling Bharatiya Janata Party (BJP), and it is not purely a vehicle created for – and around – his own power. Modi rose through the ranks of the BJP and the BJP will be there when he’s gone. The BJP’s discipline, organisation, and ideological underpinnings in the RSS (a Hindu-nationalist organisation) have provided the wiring for his shock treatments at the ballot box. This makes the BJP not just an effective administrator but also a seemingly inexorable electoral machine – with single party majority at the centre and alliance or majority governments in 16 states and union territories in India.
Despite this platform and mandate, the Modi government has tried, and failed, to achieve more mundane outcomes like state disinvestment targets. Some of the more seminal legislative initiatives (land reform, agricultural reform – and even labour reform) also foundered. The regulatory environment remains cumbersome and uncertain – if trending towards better. Centre-state relationships (especially with States where the BJP is not in power) have never been more strained. Furthermore, the Modi is often accused of creating quasi-monopolies by disproportionately favouring a handful of billionaires whose fortunes have vastly expanded under his rule. Combined with the taut social fabric, it creates a backdrop that is not pretty, but will be manageable for international investors - with the right focus, diligence and risk planning. In the run-up to general elections in the summer of 2024, Modi is projecting a pro-poor, pro-business form of governance where welfare will continue to drive direct benefits to those at the bottom of the pyramid; even as a growing market promises international investors more certainty.
The flip side of this populist majoritarianism is it has allowed Modi to get things done in a notoriously tortuous polity. During his nine years in the PM’s office, India has attracted over USD 500bn in foreign direct investment; recorded an average growth rate of 6.85% (barring the two pandemic years); and, climbed 69 places in the World Bank’s Ease of Doing Business rankings. Modi has pursued strong-willed reforms such as the implementation of uniform taxation regime for goods and services and an Insolvency and Bankruptcy Code. His government has enabled a vast digital ecosystem giving most Indians access to cheap and affordable internet services through smartphones. As a result, the economy is digitising at a tremendous pace – for instance, India records billions of digital transactions (made through mobile phones) every month. Urban infrastructure has witnessed a huge expansion with new airports, highways and railways. India has embarked on an ambitious energy transition with renewables a genuine priority. Likewise, Modi is giving a big push to domestic manufacturing under the ‘Atmanirbhar Bharat’ (self-reliant India) vision to create opportunities for foreign companies to manufacture in India. The Aadhaar biometric card has been taken up by the poorest and the richest of India to create an immense digital services delivery system and possibly the world’s biggest single human data set. Such class and caste-transcending inclusivity has never been achieved before. All these factors now lend genuine truth to the statement that India is the world’s biggest single market. The ‘interminable red tape’ tropes of well-worn foreign investor conversations have given way to ones of ‘massive opportunity’ and ‘diversification from China.’ The G20 presidency in this year allows Modi to present India as a player worthy of a seat at the top table – able to catalyse and contribute to the biggest debates of our time: climate, war and global trade.
India is projected to be the fastest growing economy in the world over the next two decades. Favourable demographic factors, the size of the country and political will to improve the business environment (in some ways) do present opportunities for foreign businesses and investors, providing they are mindful that Modi’s India will not always enjoy the reputational risk holiday as putative allies are currently giving it. But the fact remains - India will need huge external funding to realise its energy transition goals and to expand its manufacturing base particularly in electronics, chemicals, automobile, defence and renewables sectors. Efforts are underway to further expand the footprint of foreign investments in developing this digital, urban, and sustainable infrastructure that will power the next generation of growth for the country.
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Herein lies the opportunity – perhaps the biggest of the 21st Century.
So, where should international investors be focusing? At the top of the ‘investment funnel’ your strategy must align with Modi’s imperatives (think green transition, renewables, better data, fin-tech, manufacturing, tourism and services to name a few), and they must not be a pure play act of direct competition against major local incumbents (you will have a tougher path to success).
Perhaps surprisingly, India is under-regulated in many areas (cyber security and data management spring to mind), even as it suffers from excessive enforcement based on laws that may not be fit for purpose or be hopelessly out-of-date. Knowing your sector’s legal status, and the legal trajectory of that sector, is more important than ever. Moving down the funnel, India might be more unitary than at any time since independence, but that is still a relative game – the state where you land still matters. Building a data centre in Bengal is a very different proposition to building one in Tamil Nadu. Corruption, bureaucratic inertia, local regulation, local opposition (usually related to land) and the broader infrastructure-related bottlenecks are all still factors that could make or break your business forecasts. And finally, partners. India is an extremely garrulous market and you will have to work very hard to make sense of the conflicting commentary you receive on your investment target or JV partner. Go the extra mile to avoid pain later.