International Elections Series: India — Business Briefing

At a Glance

• India’s political stability, strong economic fundamentals and ongoing reforms make it an attractive market for international business. The underlying factors that contribute to its economic attractiveness are likely to remain robust regardless of the outcome of the election.
• The Modi administration’s business-friendly reforms have significantly enhanced the ease of doing business in India; but in the face of global challenges and as seen in many regions and jurisdictions, increasing geopolitical complexity and the strengthening of calls to preference domestic industry are a source of risk for international businesses.
• To effectively safeguard and maximize the potential of their operations in India, international businesses must strategically address the challenges that persist, from continued regulatory complexities to geopolitical risks and the nuances of India’s industrial policies.

Largest Democratic Exercise in History

During April and May 2024, India has organised what is described as the largest-ever democratic exercise in history, with an electorate of over 960 million voters going to the polls to elect a new lower house (Lok Sabha) of its bicameral Parliament. Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) is widely expected to win a third term of office when the results are announced on 4 June 2024, albeit potentially with a somewhat reduced majority. 

Key Factors Driving India’s Attractiveness for International Businesses

India’s attractiveness to international businesses is rooted in several key factors, many of which are likely to continue regardless of the outcome of the election.

• Consistently Strong Economic Growth: Continuing the pattern of the last decade, India’s economic outlook in this election year is strong, with GDP growth forecast to remain stable and resilient at over 7%. India is also forecast to be the third largest economy in the world by 2030.
• Large Market Size and Positive Demographics: India is now the world’s most populous country, having recently overtaken China. India’s populace trends young with a median age of 28 years old and where over 33% of India’s middle class is under the age of 35. A corollary of this is that India is home to one of the world’s largest consumer markets, with some expected 350 million online shoppers by 2025 and an internet economy anticipated to be worth $1 trillion by 2030.
• Significant Talent Pool: Linked to its positive demographics, India has one of the world’s largest workforces, a significant proportion of which is technically skilled. 

Business-Friendly Reforms Under the Modi Administration

Beyond these strong fundamentals, the Modi administration’s period in office has seen a suite of business-friendly reforms, under the campaign “Made in India”, which has increased India’s attractiveness to international businesses and global multinationals. According to the World Bank’s Doing Business reports, India has jumped from 130 on its overall ranking in 2016 to 63 in 2020 (the last report which is available). 

The reform agenda has included:

• The introduction of a nationwide goods and service tax (GST) regime which simplified the previous system and brings greater alignment between Indian states
• The introduction of an insolvency and bankruptcy code which has greatly modernised the previous regime and aimed to improve the mechanisms available for debt recovery and to speed up judicial enforcement and resolution procedures
• The rationalisation of personal and corporate tax systems, with the base corporate tax rate for domestic companies reduced significantly

Enduring Challenges

Nevertheless, challenges remain. 

• Regulatory Complexity: Important steps have been taken to cut red tape and improve general efficacy, but India’s regulatory environment remains challenging. It is inherently complex owing to the overlapping and interlocking jurisdictions of its national government, states and regulators, which can lead to various political and bureaucratic hurdles and general uncertainty. 
• Labour Market Challenges: The regulatory framework and tax structures encountered by businesses setting up in India are quite opaque, and foreign-owned businesses can be subject to significant levels of scrutiny. International businesses have increasingly used professional employer organisations (PEOs) to obtain the services of local workforces, but these arrangements are open to challenge by regulatory and tax authorities.
• Geopolitical Risks: India is expected to benefit from moves by international businesses to restructure supply chains away from China, either completely or as part of a ‘China + 1’ strategy, but this does not mean it is free of geopolitical risk. A Modi-led government is likely to continue its pursuit of strategic autonomy regardless of U.S. overtures, as evidenced by India’s continued import of Russian oil and its recent agreement with Iran to develop the Chabahar port. 
• Protectionism and ‘Self-Reliant India’: The Modi administration has increasingly emphasized the concept of ‘self-reliance’, through the ‘Self-Reliant India’ campaign (Atmanirbhar Bharat Abhiyaan). To the extent it signals a shift towards a more protectionist policy environment, it could complicate the landscape for international businesses. International businesses need to ensure tariff policy and IP protection complement their India strategy. High tariffs can reduce the profitability and efficiency of local operations. Inconsistent or weak IP enforcement, even with a robust legal framework for IP rights, can also result in reduced competitiveness. Such considerations are crucial in effectively and efficiently incorporating India into global supply chains.