Thursday, February 28, 2013

India’s Union Budget 2013

India’s Finance Minister will be assessed by international investors on policy changes to increase foreign inflows, clarify tax laws and expand the country’s tax base, in his presentation of the Union Budget shortly after the latest gross domestic product (GDP) data is released today.

India's current-account deficit (CAD) has worsened since 2008 due to slowing exports and expensive oil and gold imports. It recorded a current account deficit of $22.3 billion in the third quarter of 2012, or 5.3% of GDP, the worst in a decade. That compares with less than 1% of GDP in the first half of the last decade.

“The Finance Minister has to steer the country away from the danger of being the first BRIC country to lose investment grade status via a credit downgrade,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “He has a challenging task of revving a growth engine, that sputtered under his predecessor, with the fuel of more foreign capital and wider tax collections.”

             “India’s current tax base represents fewer than 35 million, or a dismal 3% of its population,” said Rangar. “That contrasts the size of its middle class estimated to be 250 million people that’s expected to reach 600 million by 2030.”

India’s CAD is being financed through stable capital flows, according to India’s Harvard-educated Finance Minister P. Chidambaram. In 2012, Foreign Institutional investments (FII) totaled $10 billion and the country attracted $27.3 billion worth of Foreign Direct investments (FDI). Both combined represent $37.3 billion, which isn’t enough to feed the growing CAD.

On the other hand, annual remittances into India that currently fuel the world’s largest remittance-corridor, surpassed $70 billion in 2012, as NRIs took advantage of a week rupee and high deposit interest rates at Indian banks.

“India’s secret weapon is its 25 million strong overseas diaspora who sent twice as much money into India in 2012 than FDI and FII combined and more than net earnings from exports of software, business, financial and communication services,” said Rangar. “$70 billion in annual remittances by Non-Resident Indians (NRIs) provides India with a distinct advantage over other BRIC economies.”

“Cutting subsidies and privatizing public sector companies will only go so far,” said Rangar. “The Budget should make it seamless for Non-Resident Indians (NRIs) to use their remittances to invest in Indian company securities, mutual funds and other investment products and foster an increase in annual remittances into India.”

“India needs to attract more inward investment and better collect tax to fund the $1 trillion requirement outlined by the Prime Minister to build the country’s infrastructure over the next five years,” said Rangar. “Better infrastructure is critical to increase India’s GDP as it will shear waste and inefficiencies in agricultural and industrial output.”

              To attract foreign investments, the government should best amend its controversial tax law and not impose tax with retrospective effect on overseas deals involving local assets. India has also said it may soon finalize the rules for a proposed clampdown on tax avoidance as it considers delaying implementation of a plan that also spooked foreign investors.

              India is currently aggressively pursuing tax claims against multinational firms and has targeted several companies for tax audits on transfer pricing.

              “The Indian tax man’s potential treatment of low cost intellectual capital work allocated by India to multinationals, as being a higher value service and therefore, taxable at higher rates, will give reason to multinationals to seek other jurisdictions where taxation is simpler and the cost advantages are as good, if not better than India,” said Rangar. “The tax man should focus its efforts to widen the tax base and therefore, increase revenue.”

             India, currently the world’s tenth-largest economy, is vying to be among the top five by 2022, according to the London-based Centre for Economics and Business Research (CEBR).

Is India Wooing the Wrong Dollar-surplus Segments?

India needs foreign exchange. The country's oil import bill was US$15.6 billion in January 2013. Total imports were US$45.6 billion and exports were a much lower US$25.6 billion, leaving a monthly trade deficit of US$20 billion. Projections for the full year (2012-2013) put the deficit at US$200 billion, up from US$185 billion last year. "This is unsustainable," says D.S. Rawat, secretary general of India's apex chamber of commerce, Assocham.

The government can't do much about the petro-goods import without crippling the economy. And leaders seem to be unable to do much about gold imports -- the second biggest item in the import basket. In calendar 2012, India imported more than US$40 billion in gold. Recent increases in import duty are not likely to help given the practically insatiable Indian demand for the yellow metal. According to the World Gold Council, India will import 965 tons of gold in 2013 compared to 864.2 tons in 2012.

There was a time when India lived on loans and aid; the 1991 crisis that ushered in economic reforms and liberalization saw foreign exchange reserves come down to US$1.2 billion in January of that year. (Reserves stand at around US$300 billion currently.) Today, India is among the fastest-growing economies in the world and can't rely on foreign largesse.
How will the government balance the books? Experts say a strong first step would be to create an atmosphere conducive to physical exports and invisibles like information technology (IT). But this takes time. So, as a short-term measure, they say, the nation must embark upon wooing the world.

Wooing Foreign Investors

Early this year, Indian Finance Minister P. Chidambaram was hard-selling the India story to foreign investors in Hong Kong, Singapore, Frankfurt and London. "FIIs [foreign institutional investors] are betting big on the India growth story," he said while in London. "FDI [foreign direct investment] inflows will also improve."

Chidambaram has ushered in a new wave of reforms and some of the anti-FDI moves of his predecessor -- and now president Pranab Mukherjee -- have been watered down. But multinationals including Vodafone, Nokia and Shell are currently immersed in tax disputes with the Indian government. So the jury is still out on whether the climate for foreign investment has changed that radically in India.

The numbers reveal that the India growth story cannot be ignored by companies facing stagnant markets at home. Even in a bad year -- GDP growth is expected to slip to 5% in 2012-2013 -- there are opportunities. "FIIs pumped in more than US$24 billion into Indian equities in 2012," notes Dhruva Raj Chatterji, senior research analyst at Morningstar India. This is the second highest FII inflow in any calendar year into the Indian stock markets. The highest FII inflow was US$29.35 billion in 2010. In 2011, there was actually an outflow of US$0.36 billion.

Given the calamitous 2011, the last year was obviously good news for the Indian markets. "The key takeaway is that India was an indirect beneficiary of global liquidity and sentiment in 2012, which led to large inflows into riskier asset classes like emerging market funds and exchange traded funds during the year," says Chatterji. FIIs have been blowing hot and cold with India. In 2007 and 2009, there were inflows of US$17.65 billion and US$17.47 billion. In 2008, there was an outflow of US$11.97 billion. "FII inflows have been volatile and fickle over the years," adds Chatterji.

Chidambaram is aware of that. His real target during the overseas visits was FDI money. If companies are investing in plants and machinery, it is not so easy to pull out if things go wrong. FDI, by its very nature, is there for the long haul.

And FDI is the real worry, experts say. In November 2012, FDI inflows into India declined to a two-year low of US$1.05 billion. In the equivalent month of 2011, it had been US$2.53 billion. Aggregates also show no clear trend. Total inflows were US$36.50 billion in 2011-2012 against US$19.42 billion in 2010-2011 and US$25.83 billion in 2009-2010. "FDI and FII inflows are very unstable as they are highly dependent on investor sentiment, capital market performance, the country's growth, political stability and the value of the currency, among other factors," notes Bundeep Singh Rangar, chairman and founder of IndusView, which advises multinational companies on business opportunities in India.

India Tops in Remittances, But...

Yet even as Chidambaram was talking to potential investors in foreign cities, Prime Minister Manmohan Singh and President Mukherjee were playing host to a much larger party at Kochi, in the southern Indian state of Kerala. This was the 13th meeting of the Pravasi Bharatiya Divas (PBD).

Translated as non-resident Indian (NRI) day, the PBD takes place every year in January. It is a recently-discovered opportunity to celebrate -- but it wasn't exactly a resounding success, observers say. NRIs come in too many hues to have much in common. There are Indians who have been abroad for centuries (and are classified as people of Indian origin -- or PIOs). Others may have gone to the Gulf as migrant labor only a few months ago. The green card holder from the U.S. likely can't even talk in the same language as the mason from Madurai: India has 21 official languages and several thousand dialects.

Yet Finance Minister Chidambaram could probably have made a better pitch in this case, experts say. FIIs are whimsical -- fund managers tend to rush in and out to wherever in the world they see the chance of making profits. FDI, however, always wants its pound of flesh: if a company is putting one billion dollars into a soda factory, it will make sure local competitors do not receive undue favors from the government. NRI money doesn't come with such strings attached. "Remittances to India are expected to cross US$70 billion in 2012," notes Rangar. "They have been more stable and consistent and have been growing steadily."

According to the World Bank's Migration and Development Brief, officially recorded remittances to developing countries are expected to reach US$406 billion in 2012, up by 6.5% from US$381 billion in 2011. The next year will see a further jump of 8%. "The size of remittance flows to developing countries is now more than three times that of official development assistance," the brief continues. The World Bank reports that India is the top recipient followed by China (US$66 billion), the Philippines (US$24 billion), Mexico (US$24 billion) and Nigeria (US$21 billion).
FDI and FII money will together account for some US$40 billion at best this year against remittances of US$70 billion. So shouldn't there have been a grander reception at Kochi, much more hoopla, and investment advisors with a cadre of options for such money? But Chidambaram wasn't there, and Y.A. Rahim, president of the Indian Association of Sharjah, says he won't be there next year. "It was a waste of time," he notes.

"There are three clear segments of NRIs," adds Ashvin Parekh, partner-national leader of global financial services at accounting and consulting firm Ernst & Young. "First, those who work in environments where they will never get a resident visa, like in West Asia or in difficult environments like Kazakhstan. They have no option but to send their money back to India. Second are people who may migrate, but are in specific jobs or roles like the area of technology. These people typically have short-term job and income opportunities. This segment also doesn't have too much of a choice. The third segment comprises individuals who run their own businesses. Many of them first moved to Africa and then they and their families moved to the U.K., Canada, the U.S.... They possess substantial wealth and, importantly, have the option of not sending it back to India."

A Neglected Segment

According to Parekh, "The Indian government has conveniently ignored the first two segments because they don't have a choice. But it also has not focused on the third segment because of sheer lack of any thinking or planning. We are so engrossed in micro-politics that there is no proper plan or approach toward attracting any kind of foreign inflows. If there was any thinking, I am very sure we would have had proper instruments for all the three segments of NRIs."
"I've been saying for the past decade that this is an area that needs focus," adds Jayati Ghosh, professor of economics at the Jawaharlal Nehru University in New Delhi. "Most of the remittances in the past, especially in the 1990s, came from workers in the Gulf and West Asia. Since the 2000s, 50% has come from the U.S. When they come back, they get the money back in the form of a remittance. So at present there are two slightly different things at play.
He notes that one argument for why the government has ignored the Gulf money is a class factor. "These are workers of lesser skills," Ghosh notes. "They are semi-skilled and unskilled workers, including women who go as domestic maids and nurses. The government is really not bothered. Because these countries allow only limited tenure, remittances continue to be stable."
It's not all about altruism for the NRIs who have a choice: "Here's the underlying reason: The average key lending rates of central banks in the U.S., the U.K. and the European Union were 0.61% in 2012, the same in 2011 and 0.58% in 2010," Rangar says. "In comparison, the Reserve Bank of India offered 8% in 2012, 8.25% in 2011 and 6.25% in 2010. This means that the arbitrage in interest rates kept increasing over the years. It went up from 4.36% in 2008, to 5.67% in 2010 and topped 7.39% in 2012."

To be fair to the government, however, it is much easier to tap someone like London-based L.N. Mittal, who is 21st on the Forbes global billionaires list, than to separately reach 1,000 cooks. The cooks, carpenters and casual workers were there in Kochi. They were largely people on holiday attending the PBD to find some entertainment. (According to official figures, the Indian diaspora across the world is around 25 million with 1.8 million in Saudi Arabia alone.)

Need for Innovative Thinking

But when dealing with the masses, there are other ways to make people more welcome and investment more attractive, experts note. Parekh suggests changes in the tax environment. "We can look at having tax avoidance treaties with those countries that have a large population of NRIs," he says. "What could scare all three segments is this talk of taxing the rich and inheritance tax." (Chidambaram has started a discussion on the introduction of estate duty, which was removed some two decades ago.)

Ghosh adds that payment mechanisms should be improved. "In Kenya and other countries, they are experimenting with mobile telephony as a way of transferring money," she says. "We should definitely improve the technology and reduce the red tape for the people at home to collect the money. We should also think of innovative ways of channeling these remittances toward infrastructure and similar activities that would benefit the local communities rather than simply consumption."

For Rangar, it's about leadership going back on the road. "There is no one online distribution platform to sell investment products, such as an India sovereign bond, to NRIs," he notes. "That means that road-shows are required with select NRI audiences, which are time-consuming and require political will and execution. But it would certainly produce more results and stickiness than trying to attract skeptical foreign investors whose capital can be fleeting in times when foreign funds are most needed."

India Union Budget 2013 - IndusView on BBC Radio 5

Friday, February 22, 2013

UK Prime Minister David Cameron urges India to Open up to British business

IndusView, Friday 22 February 2013 (London): UK Prime Minister David Cameron concluded his trip to India this week to meet his Indian counterpart, Manmohan Singh, as well as the Indian president, Pranab Mukherjee, asking them to open its trade doors wider to British business.

Mr. Cameron’s trip, his second visit to India as prime minister, comes days after a similar trade mission by President Fran├žois Hollande of France, underlining how Europe’s debt-stricken states were competing to tap into India, which has one of the world’s fastest-growing economies.

“Cameron recognizes that India’s got what the British and Europeans want…perhaps even need,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “An economy that’s doubled in the past six years, which will double again in the next six years to approach $5 trillion. It’s also underpinned by a demographic advantage. A majority of Indians are still under 40 years of age with increasing discretionary spending.”

At a time when the British government is struggling to get its economy growing, officials see India as a key strategic partner. Mr. Cameron said it himself: he wants the relationship between Britain and India to be “one of the great partnerships of the 21st century“. India and the UK have vibrant economic ties and the two-way trade rose to about £10.58 billion ($16.16 billion) in 2011-12 from £8.22 billion ($12.56 billion) in 2010-11. Mr. Cameron said the countries were "on track" to double overall trade to £23 billion ($35.14 billion) by 2015.

Mr. Cameron said the two countries enjoy a “special relationship,” a term usually reserved for Britain’s ties with the United States, but it is a relationship undergoing profound change. The Indian economy is forecast to overtake Britain’s in size in the decades ahead and to become the world's 5th largest economy by 2020. In a nod to how the relationship is evolving, Britain will stop giving India aid after 2015.

Investors have been clamoring for years for India to open up to more foreign investment, and Mr. Cameron complained Monday that India still had outdated rules and regulations – The government should take more steps to improve the ranking of India from 173rd position by simplifying processes for making it easier for entrepreneurs to start a business.

Another of the trip's aims is to address controversy over the recent toughening of UK visa rules. Mr. Cameron said there was no limit on the number of Indian students that could come to British universities, as long as they had an English language qualification and a place to study. The UK is a popular destination for Indian students, second only to the USA. According to the UK Border Agency, the number of student visas issued from India dropped to 32,000 in 2011 from 41,000 in 2010.

The prime minister also spoke of making Britain's visa system simpler for Indian businesses, by introducing a same-day visa service.

The Indian Prime Minister, Manmohan Singh, expressed his concerns about the AgustaWestland deal since there have been allegations of bribery, which are being investigated by the Italian authorities. AgustaWestland signed a contract to supply 12 AW101 helicopters to the Indian air force in 2010 and employs more than 3,000 people in Somerset, UK. In response, says Britain will cooperate fully in the investigations.

During their talks Mr. Cameron and Mr. Singh also agreed more co-operation between Britain and India in combating cyber attacks, including police training exchanges and research into online security.

The Prime minister visited site of 1919 Amritsar massacre in India, where hundreds of Indian civilians were shot dead by British forces. Past prime ministers have expressed their regret, but Mr. Cameron is the first to pay his respects at the site in person.

Mr. Cameron’s delegation, which includes representatives of more than 100 companies, is the biggest taken abroad by a British Prime Minister. It includes four ministers, nine members of Parliament and companies including BAE Systems, BP, De La Rue, Diageo, the British unit of EADS, HSBC, JCB, Lloyd’s, the London Stock Exchange, London Underground, Rolls Royce and Standard Chartered.

Wednesday, February 06, 2013

Foreign M&A investors shun India as uncertainty reigns

Doing Business in emerging markets often requires as strong a stomach as eating at a roadside food stall, but investors last year were particularly wary of India, according to a report on inbound mergers and acquisitions by law firm Freshfields Bruckhaus Deringer LLP. The report shows that while China, Mexico, Russia and Brazil all experienced increased activity last year, India suffered a slump.
The value of foreign M&A investments targeting the top 24 growth markets grew 5% last year to $162.4 billion, rebounding from a 25% decline in 2011, even as global M&A value dropped almost 5%.
In India, however, which had a relatively strong 2011, deal value fell by 42% to $10.4 billion, said the report, which used Thomson Reuters data; although the number of transactions was almost unchanged (292 deals in 2012, versus 281 deals in 2011), the average size was far smaller.
Uncertainty over taxation (especially in the wake of the Indian government's decision -- since put on hold -- to impose a tax retrospectively on Vodafone Group plc's $11 billion acquisition of Hutchison Essar Telecom Ltd. in 2007) and the implementation of new antitrust rules contributed to the nervousness. Meanwhile, a depreciation of the Indian rupee, which undermines profitability for dollar-denominated funds, reflects a more general slowdown in Indian growth. Add that to concerns about large-scale corruption, exemplified last year by the furor over the allocation of second-generation mobile licenses and coal production licenses to allegedly favored companies, and investors have grounds for caution.
"I think there are a handful of factors you can look to, to explain a loss of confidence for people investing," said New York-based Freshfields partner Matthew Jacobson. "It's not necessarily in the underlying economics, but in the stability and predictability of what the rules will be."
PricewaterhouseCoopers International Ltd.'s Sanjeev Krishan, transaction services director at the firm's Indian affiliate, agreed. "For four or five months last year there was hardly any investment by private equity funds," he said. "There was so much regulatory uncertainty and it really spooked the investor community. Minds were not focused on making fresh investments, but on the tax implications if they did make them."
Krishan said not only inbound financial investment but also deals by strategic investors, with the possible exception of Japanese corporates, had dried up. While there were a number of very small deals, many of them venture investments worth less than $10 million, large transactions were elusive. With high prices and many previous infrastructure investments struggling with debt, and with the coal-sector scandal still reverberating, he added that people "did not want to touch infrastructure with a bargepole."
The statistics bear him out. According to IndusView Advisers Ltd. CEO Bundeep Singh Rangar, who advises multinational companies on opportunities in the Indian market, the number of deals in the Indian energy sector, for instance, has dropped dramatically. Deals in the sector fell from $837 million in the third quarter of 2011 to just $41 million a year later.
"The big-ticket deals will come from guys who want to buy a big mobile operator or a big energy company, which are expensive deals," Rangar explained. "But their boards are going to be cautious, and say we don't have clarity on the taxation and let's be sure we're buying into an economy that's continuing to grow."
He said financial investors were also worried about potential exits, because a depreciating currency could turn a rupees profit into a loss in dollars.
Yet valuations have not fallen in line with investors' expectations, Rangar said. "Indian entrepreneurs just need a bit of a reality check."
Transactions in some sectors have continued. In the IT sector, especially with the growth of broadband delivery, transaction values more than doubled from $503 million in the third quarter of 2011 to $1.3 billion a year later.
Waajid Siddiqui of Hogan Lovells LLP suggested that the proliferation of smaller deals might also be a natural development as the market matures, with both Indian and foreign investors shifting their focus from energy and real estate deals in favor of media and financial services, for example.
"These may not be the intuitive sectors for big transactions," he said.
A number of big private equity firms have been long-term investors in India, although none of those approached for this article -- 3i Group plc, Blackstone Group LP and Warburg Pincus LLC -- would comment. Last summer 3i CEO Simon Borrows said the firm was "cool on India" and likely to remain so "until there's greater certainty around the politics and the economy."
Warburg Pincus' website shows the firm made at least three investments in the country last year, two in retail and small business loans and one in classified advertising.
Taxation issues, and the long drawn-out battle to open the national market to large foreign retailers, have both been entangled in the country's perma-deadlocked coalition politics. However, Indian finance minister Palaniappan Chidambaram has indicated he will postpone the introduction of a wide range of general tax avoidance rules and may consider exempting some foreign investors entirely.
Chidambaram has also attempted to sort out the Vodafone mess, which has direct implications for billions of dollars worth of similar deals between two offshore shareholders, often structured through vehicles in Mauritius. Reports have made conflicting predictions, with some expecting him to propose exempting -- or "grandfathering" -- existing deals and to subject only future transactions to the new tax laws, but others suggest the government could reach a deal with Vodafone to waive the interest and late-payment penalties portion of its $2.6 billion tax bill and accept a reduced amount for the initial sum.
Meanwhile, antitrust legislation, which spooked investors because of the likely delays in completing deals, has turned out to be less of a worry than initially feared.
"It is not clear that the introduction of mandatory merger control with effect from June 2011 has affected the appetite to do deals or deals of a particular size," said King & Spalding International LLP lawyer Suzanne Rab, author of "Indian Competition Law: an International Perspective".
"Fears that the requirement to suspend implementation of transactions for up to 210 days until the regulator made a decision on a proposed deal do not seem to have been borne out. In practice, the Competition Commission of India has decided on a merger case well within that long stop time frame."
In fact, the government has also proposed shaving about a month off the merger process, by reducing the waiting period for deemed approval from 210 to 180 days, but Rab pointed out that the government may still spring surprises on mergers in certain sectors by changing the tests and thresholds for whether a deal should be subject to automatic antitrust scrutiny.
"Banking, pharma and regulated utilities have been mooted as particular sectors where modified thresholds might be adopted," Rab added.
As the government tries to remove at least some of the uncertainties, with what Freshfields' Jacobson calls "some of the right body language," optimism among dealmakers is beginning to return.
To spur growth, the Bank of India cut its key interest rate on Jan. 29 from 8% to 7.75% after adjusting its 2012-'13 financial year GDP growth forecast down slightly to 5.5% and predicting the next financial year will see growth of 6.5%; it has also emulated China by reducing the amount of cash Indian banks must set aside as reserves.
"India always likes to compare itself with China when it comes to economic growth," said IndusView's Rangar. "China's engine seems to be restarting a little bit, so India will be keen to follow."
Caution remains the watchword, however, not least because of India's perennial political uncertainty. Will the individual states implement the federal government's decision to open the market to foreign retail chains? Will the upper house of parliament agree to reforms pushed through the lower house? And will investors be able to rely on any decisions by the current government with elections due in a year's time?
PwC's Krishan warned: "It will take time before we recover. I'm not sure we've done enough to incite strategic investors to come back."