Why MNCs are quitting India

Eight years after Prime Minister Narendra Modi first urged multinationals to do ‘Make in India’, Asia’s third-largest economy is seeing many foreign companies giving up the country.

A slew of big names, including German retailer Metro AG, Swiss building materials company Holcim, US automaker Ford, UK banking giant Royal Bank of Scotland, US motorcycle maker Harley-Davidson and US banking giant Citibank have chosen to pull the plug on their business. activities in India or shrinking their presence here in recent years.

That’s a worrying trend at a time when India is trying to position itself as an alternative to China, in a post-Covid world where many multinationals want to diversify their supply chain.

A total of 2,783 foreign companies with registered offices or subsidiaries in India closed their operations in the country between 2014 and November 2021, Trade and Industry Minister Piyush Goyal told parliament late last year. That’s no small figure, as there are only 12,458 active foreign subsidiaries operating in India.

While the reasons are company specific in some cases, such as restructuring to contain losses, failing to crack India’s price sensitive market, or turning to green companies, several have also given up India due to regulatory flip-flops, high tariff barriers, bureaucracy, mind boggling land policies, infrastructure issues and other matters related to the ease of doing business.

Minister Goyal’s office did not respond to a request for comment.

“The ease of doing business in India has definitely improved over the past five years. However, to bring about this improvement, the government is constantly making regulatory changes that took some getting used to. From incorporation to assessment, the government aims to automate processes. However, we have seen that the implementation of these processes is not in order. As the government plans to simplify the regulatory processes in India, the constant changes are creating uncertainties,” Neeraj Agarwala, Partner, Nangia Andersen LLP, told DH.

To make matters worse, there are 26,134 jail terms in India’s business laws, according to an Observer Research Foundation report that highlights the risks entrepreneurs and corporations face when doing business in India.

“India suffers from ‘regulatory cholesterol’ that stands in the way of doing business. The laws, rules and regulations enacted by the unions and state governments have over time erected barriers to the smooth flow of ideas, organization, money, entrepreneurship and thereby the creation of jobs, wealth and GDP.” , said Gautam Chikermane, Vice President at ORF, and Rishi Agrawal, Co-Founder and CEO at Avantis RegTech.

PM Modi’s dream of turning India into an electronics manufacturing hub could face serious hurdles if the country does not work to resolve these issues.

This could also explain why some of the world’s largest chipmakers have not warmed to India, despite the government rolling out a red carpet for them by approving a $10 billion stimulus plan last year to boost chip and display industries. to settle the country.

“All the top guns in the semiconductor industry are Indian, why did they have to leave the country 30 years ago, that was because there was a lack of infrastructure, right? So if these biggies see potential in the next 20 years, then they will invest,” said Arokiaraj Jesudoss, Senior General Manager, Research & Development, 3M. “When a private company invests, it wants a profit.”

“Only the first-class companies will invest – those who have established technology or don’t want to develop much, but want to bring second-class technology to India. We have to take advantage of it and then catch up with the latest technology. So once we get that and meet domestic demand, investment will pour in, once the giants of the game see potential business in India,” he said. “It’s not just about how much incentive the government provides, but how much profit they make. generate in the future.”

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Companies around the world find India hard to ignore due to its huge population and huge market potential, but for many, doing business here has not been easy.

“India is probably the country with the highest tariff in the world,” former US President Donald Trump told reporters in New Delhi two years ago, complaining about the high tariff that Harley-Davidson had to pay into India.

Regulatory flip-flops have also driven companies out of India.

“India’s struggle is the inability to simplify regulations. Complex framework creates confusion and proves annoying for investors. However, simplification leads to exploitation and tax leaks. India needs to find a healthy balance that is attractive to multinationals,” said Agarwala.

In February this year, the government paid British company Cairn Energy Plc ₹7,900 crore to repay the taxes it had collected to enforce a retroactive tax claim. Last year, it passed legislation to drop outstanding claims against multinationals, including telecom giant Vodafone, pharmaceutical company Sanofi and brewer SABMiller.

“Retrospective taxation (as in the case of Vodafone) prohibits entry,” Professor Shekhar Tomar of the Indian School of Business told DH.

India could certainly do more to attract more multinationals.

“It is not a one-day process. Reduce regulations, don’t change rules too often, avoid tax afterwards. For example, stability in tariff structure is very important to enable multinationals to integrate India into global value chains. Likewise, many laws vary by state and need to take a proactive role to attract multinationals,” said Professor Tomar.

It is clear that India still has a long way to go in this area.

Last month, Tesla said it had shelved its plans to sell electric vehicles in India after failing to convince the government to cut unaffordable import taxes. The US automaker wanted to test the waters in India by selling its foreign-made EVs and sought a lower rate. But the government wanted it to make its vehicles in India first before giving it what it wanted.

India levies 100% tax on imported cars with a price tag above Rs 30 lakh, while cars cheaper than 60% are taxed.

“Reducing excise taxes on EVs to 25% from current levels that are even 100% would not pose a threat to domestic players, but would help boost investment and accelerate ecosystem creation,” Gurpratap Boparai, the Skoda Auto’s MD Volkswagen India told Bloomberg last year, when it backed Tesla’s push for a tax cut on EV imports.

Some disagreed.

“I don’t believe there is a need to give any single company special incentives,” Manoj Garg, Investment Director, WhiteOak Capital Management, told DH. “Some of the big international companies entered China not because the local government gave them special incentives or privileges, but because they saw potential for demand.”

When asked if he would consider setting up a factory in India, Tesla chief executive Elon Musk tweeted last month that the automaker would not set up a factory “in a location where we are not allowed to sell and service cars first.”

Musk will instead look for potential opportunities in Indonesia, which is known for its business-friendly policies and production of nickel, a critical ingredient in making EV batteries.

Musk is not alone in looking beyond India.

A 2021 Permanent Parliamentary Committee report titled “Attracting Investment in the Post-Covid Economy: Challenges and Opportunities for India” pointed out that foreign companies that have relocated their manufacturing bases from China during the pandemic have chosen countries such as Vietnam, Taiwan and Thailand. , and only a few came to India.

There are significant challenges in attracting investment, including administrative and regulatory hurdles, insufficient and expensive credit, tedious land acquisition procedures and inadequate infrastructure facilities, high logistics costs and a large disorganized manufacturing sector, the report said.

“The policy changes and incentives that the government has put in place to address these challenges are welcome measures and are moving in the right direction. However, its success depends on the implementation of the reforms,” ​​the commission said.

NOT ALL GOVERNMENT FAULTS

Certainly, many multinational corporations, especially automakers, had to leave India due to their own inability to crack the world’s fourth largest auto market, resulting in poor sales.

“We must remember that the Indian market is generally very price sensitive as the majority of people in India have a low per capita income. Price, product and positioning are very important for sustainable growth in the Indian market,” said Agarwala.

“There is definitely a lack of planning or understanding of the Indian markets among MNCs that have failed. The competition is also very high and most foreign companies are struggling to meet customer expectations. Cultivating brand loyalty on the Indian The market is also very difficult, especially when companies succumb to product customization, ie making cheaper alternatives,” he said.

Others agreed.

The automaker’s exits were “due more to a failure to adapt to the market than to a regulatory problem,” Garg said, pointing to the divergent fortunes of foreign automakers such as Ford and Hyundai in India.

“Look at Hyundai, which is also an international company, but they’ve done well because of the product range and developing ecosystem around the products,” he said.

Some multinationals also left India because of a change in their own priorities.

For example, Holcim decided to sell its Indian business to billionaire Gautam Adani to move away from traditional cement and better meet the growing demand for energy-efficient buildings, while Citibank left India as it decided to abandon global retail banking, according to Srinath Sridharan. , a visiting fellow at ORF.

“It’s just that they have their own global strategy,” Sridharan told DH.

While he doesn’t support preferential treatment for MNCs, he said two areas the country could work on to attract more MNCs are simplifying regulations and offering unilateral evictions.

“Do we have it right now? No. Would it help? Yes, it would be very businesslike. But at the same time, a smart businessman doesn’t wait for that, he goes to a law firm,” Sridharan said.

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