India’s Outlook 2021: Foreign Investment Opportunities in FMCG, Pharma, E-Commerce, IT, and Electronics
By Rohit Kapur, Dezan Shira & Associates New Delhi
India’s economy is set to bounce back strongly in 2021 as businesses return to pre-COVID-19 levels. Even though the pandemic is far from over, India is learning to live with the virus. Reported number of COVID-19 cases have gone down by more than half from peak levels. This, coupled with the news of a number of vaccines having completed successful trials, has led to renewed optimism in the prospects for the Indian economy in 2021-22.
Nomura expects India to be the fastest growing Asian economy in 2021 and its recent forecasts have pegged the Indian economy to grow at 9.9 percent in 2021 – faster than China (at nine percent) and Singapore (at 7.5 percent).
Other rating agencies, such as Standard & Poor (S&P) and Fitch Ratings have also revised their India growth forecasts on account of better-than-expected economic revival. For the FY 2021-22, S&P has now projected India’s growth to rebound at 10 percent and Fitch Ratings at 11 percent.
We briefly spotlight the factors that have also contributed to this sense of optimism.
Renewed thrust on manufacturing
The Government of India has put in place a number of policy initiatives to make the country a global manufacturing hub under the overarching plan of ‘Atmanirbhar Bharat’ or ‘Self Reliant India’. ‘Vocal for Local’ and ‘Make in India’ initiatives have been supported by business-friendly reforms and incentive schemes to attract foreign manufacturing companies.
In November 2020, the government approved the extension of its Production-Linked Incentive (PLI) Scheme to 10 flagship sectors, with incentives totaling INR 1.46 trillion (US$19.54 billion). The PLI scheme had previously benefited three major sectors – mobile manufacturing and electric components, pharmaceutical, and medical device manufacturing.
Recently, Apple’s three major manufacturing partners – Foxconn, Wistron, and Pegatron, along with Samsung Electronics were among a list of global firms that were cleared by the government of India for a US$143 billion Make-in-India Plan.
In October 2019, the government of India reduced the corporate tax rates for new manufacturing firms from 25 percent to 15 percent (effective tax rate 17.01 percent, inclusive of surcharge and cess). The lower tax rate has allowed India to compete with ASEAN’s emerging economies for foreign investment. India’s large consumer market further adds to its advantage. For foreign companies looking to tap India’s huge market of 1.3 billion people, there could not be a more opportune time.
Liberalization continues to benefit foreign investors
India allows 100 percent FDI in most of the sectors under the automatic route. To provide more clarity to foreign investors, the government recently published its latest consolidated foreign direct investment policy, which came in effect October 15, 2020.
It must however be noted that a few restrictions have been imposed on FDI – coming in from overseas entities or citizens belonging to neighboring countries that share a land border with India, including China. This is to prevent opportunistic takeover of Indian businesses going through a difficult time during the pandemic.
The Indian government undertook a complete overhaul of India’s contentious labor laws by simplifying and subsuming 29 archaic labor laws into four major labor codes:
- Industrial Relations Code Bill, 2020;
- Code on Social Security Bill, 2020;
- Occupational Safety, Health and Working Conditions Code Bill, 2020; and
- Code on Wages, 2019.
These Codes are in various legislative stages and are expected to be fully implemented by mid-2021.
Among the many “pathbreaking” changes, some of the important ones are: to make hiring and firing decisions more flexible for companies, reduce the compliance burden, expand the social security net, and ensure that labor unions give 60 days’ strike notice.
India also happens to offer the most competitive labor costs in Asia, with the national-level minimum wage at around INR 176 (US$2.80) per day, which works out to INR 4,576 (US$62) per month (This is a national floor-level wage – and will vary depending on geographical areas and other criteria).
This is the fourth largest sector of the Indian economy, built on the back of a growing middle class and burgeoning rural consumption. As per a report by FICCI, the Indian retail industry, which is growing at 10 percent per annum, is expected to almost double to INR 85 trillion (US$11.15 trillion) by 2021, from the current estimated size of INR 45 trillion (US$610.58 billion).
India is the largest provider of generic medicines globally and is the third largest pharmaceuticals industry in the world by volume. Rising healthcare awareness due to the pandemic will act as a major driver of growth for this sector. The Government of India recently announced an INR 100 billion (US$1.37 billion) package to boost domestic pharmaceutical manufacturing.
With highs and lows during the early days of lockdown in India, consumers shifted in large numbers to online purchasing. As a result, the major e-commerce players reinforced their logistic capability to meet this growing demand. The new normal has only enlarged the scope of this sector, which is expected to grow to US$200 billion by 2026 from US$38.5 billion in 2017.
India’s e-commerce policy, which has been in the works for over two years, is likely to be out soon, as the government is in the “final stages” of drafting it along with a host of other policies, including the National Logistics Policy and National Retail Trade policy. Undoubtedly, the government will have to walk the tight rope to reconcile the perceived conflicting interests of e-commerce players and the bricks and mortar trader community.
The Indian electronic components market is set to grow exponentially – facilitated by its low-cost manufacturing base, huge local demand, and a rapidly developing electronics ecosystem. The government is set to seek a second round of applications next month under the production-linked incentive (PLI) scheme for incentives worth INR 20 billion (US$273 million) over five years.
The pandemic was a wake-up call for many organizations to look at their IT infrastructure and security, in light of the increasingly normalized ‘work from home’ culture. The research firm Gartner believes that IT spending in India will grow at six percent to touch the US$81.9 billion mark in 2021 on account of growth in segments, such as IT services, enterprise software tools, among others.
COVID-19 has accelerated the adoption of digital technologies across segments. Companies have started adopting and improving their existing IT infrastructure not only for growth but also for their ‘survival’.
Evidently, foreign investors see these reforms and policy measures, under implementation by the Government of India, favorably. India received its highest ever FDI in the first five months of this financial year, from April-August 2020, totaling to US$35.73 billion, as compared to the same period in any previous financial year.
Rohit Kapur is the Managing Director of Dezan Shira & Associates, India and is based in our New Delhi office. A qualified Chartered Accountant, Rohit has worked in multinational engineering companies in various capacities and positions of responsibility through his career spanning 29 years. Rohit brings to Dezan Shira & Associates clients in India a diverse and rich experience in starting up and managing companies. He has also acquired experience in restructuring and turning around companies to align them with changing and evolving economic and market conditions.