From Slumdog Millionaire to Bengaluru Billionaires: UK-India Business is on a Roll

Posted by Reading Time: 8 minutes

By Bob Savic, Advisor to Dezan Shira & Associates

The multi-award-winning British film, “Slumdog Millionaire”, fired up interest among British movie goers, about a decade ago, to explore the parallels between British and Indian societies in the twenty-first century. The film’s reality-based grittiness mixed in with the fairy-tale saga of a poor Mumbai orphan seeking fortune on an Indian TV gameshow – purposely reminiscent of its real-life counterpart in the UK – left a lasting impression on Britons’ views of life in India.  One could say it partially re-made British conceptualizations of India, formerly idealized as a country intertwined with a sprawling colonial and ancient history, into a modern state grappling with the contradictions of debilitating rural and urban poverty juxtaposed beside tech-driven super wealth.

Ongoing warm UK-India ties bolster practical intergovernmental cooperation

It would be a stretch to say the recent Enhanced Trade Partnership (ETP) (see India, UK Agree to Immediate Enhanced Trade Partnership) agreed between the Liz Truss, UK’s International Trade Secretary, and Piyush Gopal, Indian Minister of Commerce and Industry, would leave a similar impression, as the film, in shaping British perceptions of India.  The UK government statement accompanying the agreement certainly gives it a try, though.  Its description of the ETP as “an important part of the government’s plan to deepen links with major economies of the present and future beyond Europe … that will help the UK build back better, greener and stronger from coronavirus” invokes aspirations not wholly removed from the film’s main character who seeks an escape from his surrounding stagnant economic and social circumstances!

Brushing aside the spin, the centerpiece of this statement is an arguably more grounded and accurate reflection of where economic relations between the UK and India are headed, namely, in the form of “… creating more trade and investment in strategic industries like science, tech and services …”.  Indeed, the overall trend in relations has been highly constructive no matter which governments have been in power, in either country, especially over the last couple of decades. This has been backed by various intergovernmental diplomatic and commercial initiatives. Most prominently, in 2004, bilateral government relations were upgraded to a ‘strategic partnership’, then elevated further to an ‘enhanced partnership’ in 2010. During those years, the UK and India set up the Joint Economic & Trade Committee (JETCO) to advance cross-border business interests and dismantle barriers to trade and investment. Fast-track mechanisms were also introduced by India’s government to identify and resolve issues faced by UK companies, from 2015 onwards.

Both governments have intensified joint development efforts in various industry sectors. This was kick-started in 2013 involving cooperation in education and safety in nuclear, radiological, chemical, and biological facilities.  Further cooperative spinoffs arose from broader programs for co-development of industrial research and development. A couple years later, the UK government’s National Investment and Infrastructure Fund supported British business investment into Indian infrastructure projects, followed by a joint government-backed scheme entitled, “Access India Program”.  This enabled UK small and medium enterprises (SMEs) to participate in the “Make in India” program – set in motion by Prime Minister Narendra Modi. Over 2018-19, an official UK-India tech alliance was created to develop technology cluster partnerships involving cooperation in artificial intelligence and digital healthcare in India, in addition to a UK-India “start-up” platform bringing together entrepreneurial and technology talent in sharing ideas and resources. These examples show how the UK-Indian relationship has shifted relentlessly towards greater tech and science-based cooperation. To top it all, the British and Indian governments have cooperated closely on tackling the global coronavirus pandemic. In this regard, the Serum Institute of India was granted the license to manufacture the UK’s Oxford vaccine, being also one of the two vaccines currently used in the country, including meticulously studying and reporting of data on the vaccine’s roll-out and side-effects.

Perhaps what was missing from this long history of official constructive on-the-ground co-development has been an overarching free trade agreement (FTA) between the two sides?  This ongoing lacuna was addressed during the 14th intergovernmental JETCO meeting, in July 2020, when agreement was reached on the ETP – as an interim agreement in providing immediate preferential trade benefits – being an important step forward in concluding a longer-term comprehensive FTA. 

The ETP will be officially launched during the UK Prime Minister’s visit to India, scheduled for end-April this year.

Bilateral trade flourishing despite no FTA

UK-India trade has been rising steadily since 2000, as the two countries have continued successfully trading on World Trade Organization (WTO) terms since their respective accessions to the trade body in 1995. India is the UK’s 29th largest export market in the world and its 25th biggest source of imports. Total bilateral trade has exceeded US$12 billion per annum, over 2015 to 2020, and rising consistently to reach an all-time high of about US$16 billion in 2018. 

UK exports to India have been growing in tandem with these expanding trade flows, albeit dropping about a third from US$6.6 billion, in 2018, to US$4 billion, in 2020, mainly attributable to the global pandemic. Britain’s largest yearly exports have been manufactured machinery and mechanical appliances, typically valued around US$1.2 to US$1.5 billion a year. The other export commodity with a recurring annual value exceeding US$1 billion has been precious stones and metals, catering for Indian households’ insatiable appetite for jewelry and gold. Other top exports by value include electrical machinery and equipment; iron, steel, and aluminum products; chemicals, optical equipment; aircraft and parts; and pharmaceutical products.  

No doubt India’s export market potential for UK goods and services should be significantly boosted once a modern, detailed, and comprehensive FTA is agreed. Presumably any such FTA would include essential coverage of digital and financial services, e-commerce, and other high-end tech services where the scope for future trade expansion is greatest, alongside appropriate data protection.  Certainly, British companies and investors will keep a close eye on how these deliberations fare over the near term and beyond.

Two-way direct investment has been particularly strong

In recent years, India has been the UK’s second largest inward direct investor. Most of the investment has come from Indian private companies looking to expand into the UK’s transparent and open market economy. The interest by UK plc for investments in India has been no less robust, becoming the second fastest growing G20 investor since 2010. In fact, from April 2000 up to December 2020, UK equity investments in the country have more than doubled. All told, they have amounted to a cumulative total of nearly US$30 billion for that period, according to India’s inward investment agency, and totaling over 400 companies employing close to a half million workers.

The UK is also India’s sixth largest direct investor accounting for nearly six percent of total inflows into India over the last 20 years. About half of UK companies invested there are exporters, of which 56 percent are in the manufacturing sector and 44 percent in services. The latter is a relatively high proportion for any foreign direct investment in a developing country, but it reflects the uniquely high-level government interaction in supporting science and technology-related ventures in the commercial space. 

Some of the top science-based industries for UK direct investment have been in life-sciences, healthcare, and telecommunications infrastructure sectors. Investment in telecoms was famously started by Vodafone’s majority stake in Indian telecoms company Hutchison Essar, in 2007. Since that time, the UK and Indian governments have become more involved in agreeing to enhanced cooperation in the field of ICT and telecoms. As a result, British companies have been exploring more opportunities for joint work with Indian counterparts, in not only servicing the Indian market, but also third countries, through their Indian bases, in areas such as 5G technology, Internet of Things, cloud computing, big data, and security of telecoms services. 

Further, major sectors attracting UK direct investments have been chemicals, pharmaceuticals, e-commerce, food processing, tourism, and services. Each industry has benefited from the Modi government’s liberalization policies; enabling 100 percent foreign ownership, which has been extended to manufacturing in sectors, such as aviation, automobiles, capital goods, textiles, and medical devices. Accordingly, about 80 percent of UK companies in India are majority UK-owned subsidiaries and about 20 percent are joint ventures with local companies. A British company taking advantage of these reforms and investing in India’s burgeoning car market, in January 2021, where over three million passenger vehicles were sold in the same month, has been Johnson Matthey’s development of a new automotive components manufacturing plant, in addition to further supporting an existing one.

Other key sectors involving direct UK-India government relations have been defense, healthcare, and biotechnology now benefiting from about three-quarters ownership thresholds being open to foreign investors. An example of defense cooperation is evident in UK’s Thales and India’s Bharat Dynamics partnership, which in January 2021 began to develop the STARstreak Air Defence System that is backed by both governments. 

Tax and investment protection treaties with India

UK investment into India is often facilitated by intermediary jurisdictions acting as holding company venues for layers of subsidiary entities in the country. Some of the more popularly used holding company jurisdictions having favorable tax treaties with India, such as for purposes of repatriating profits, repayment of interest on debt, and sales of businesses or assets are the Netherlands, Mauritius, and Singapore. India’s double tax agreements with the latter two have been upgraded to incorporate the latest OECD tax convention provisions targeting profit-shifting and tax avoidance.  New measures on business substance requirements have therefore been put into place when using these effectively low tax jurisdictions for investments into India. Even with the revamped treaties, investors utilizing such intermediary tax jurisdictions should do so with caveats attached, as the Indian tax authorities actively continue challenging benefits flowing from these treaties. In some instances, as in the Vodafone Hutchison tax case, the Indian government amended its income tax laws to retroactively capture previously court-adjudicated situations in favor of international companies against the Indian tax office.  

An alternative route into India could be the UK India tax treaty, which has also been updated by a multilateral protocol. The new version of the tax treaty still provides for generous “tax sparing” credits against UK taxes, concerning tax liabilities arising down the overseas ownership chain. The tax sparing provision, which entails credits even where tax deductions or exemptions are provided in the overseas host country, are typically only available in select UK treaties with partners having developing country status, such as India.

UK investors also typically consider the benefits of Bilateral Investment Treaties (BITs) in protecting their investments in India. This has been complicated by India unilaterally revoking up to 58 of its BITs. This included India’s BIT with the UK, which was terminated in 2017, although certain sunset clauses will remain in place for a period. Meanwhile, India will seek to negotiate a new BIT with the UK based on Delhi’s 2015 BIT model. In terms of the above-mentioned jurisdictions commonly interfacing with India in supporting investment structures from a tax planning perspective, Indian BITs with the Netherlands and Mauritius have also been terminated, subject to their respective sunset clauses, while a BIT with Singapore was never concluded. From an investment protection perspective, therefore, it may be a case of watch this space!

Favored Indian locations for UK investors

According to India’s investment agency, just over one-third of UK companies are invested in western Indian states, such as Maharashtra and Gujarat. The remainder are mainly split between two southern states – Karnataka, hosting 38 percent of UK investments and Tamil Nadu with 29 percent.   These latter states are the country’s principal technology hotspots and received a record two-thirds of cumulative UK investment over 2017 to 2018. Bengaluru (previously Bangalore) is the capital of Karnataka and as the epicenter of India’s high-tech industry, it is fast becoming the country’s wealth capital.  

The Knight Frank Wealth Report states that Bengaluru had 33 billionaires in 2018. This figure is expected to increase 40 percent by 2023, making it the fastest growing cohort of billionaires of any city in the world. Consequently, the gold rush by UK companies into the city hasn’t just been led by tech companies, but a diverse range of operators supplying the booming domestic consumer and industrial markets, including Tesco, Aon, Diageo, Rolls Royce, Rapyd, Kerry Group, Weir Group, Meggit, and many others. Should another British filmmaker decide to make “Slumdog Millionaire the Sequel”, in a southern rather than west Indian state, then Bengaluru may represent the new face of modern India for Britain’s gameshow-viewing public to reflect on.

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