Why multinational companies are quitting India

HONG KONG, Jan. 10 (Xinhua) -- A long list of multinational companies has failed in India. Notable cases include General Motors from the United States, Vodafone Group from Britain, Holcim Group from Switzerland, and BYD from China.

It seems only fair for global giants to invest in India which boasts a large and steadily growing domestic market, an ample supply of inexpensive labor, a large group of English-speaking population, decent economic growth and a favorable geopolitical situation.

However, the list of obstacles they face in India is equally long: "regulatory flip-flops, high tariff barriers, red tape, perplexing land policies, infrastructure issues and others tied to the ease of doing business," according to the Indian daily newspaper Deccan Herald.

To make things worse, the Indian authorities do not hesitate to show their ability to subject foreign companies to unfair treatment and even persecution. The third-largest economy in Asia is seeing many foreign firms giving up on the country.

THE INDIAN PARADOX

For foreign companies which expect a predictable, stable, and transparent policy framework and judicial system, the Indian authorities posed extra challenges over operational risks and market competition.

"While the government is making plans to simplify regulatory processes in India, the constant changes give rise to uncertainties," said Neeraj Agarwala, a director at consulting firm Nangia Andersen.

Worse still, there are 26,134 imprisonment clauses in India's business laws, according to an Observer Research Foundation report on the risks of corporations doing business in India.

It has become commonplace for foreign companies in India to face hefty fines for an already long and still-growing list of violations that often ignite controversy in the business community.

"The legislation, rules and regulations enacted by the union and state governments have over time created barriers to the smooth flow of ideas, organization, money, entrepreneurship and through them the creation of jobs, wealth and GDP," said Gautam Chikermane, vice president of Observer Research Foundation.

According to PwC India's former leader on infrastructure Manish Agarwal, although foreign direct investment is still coming to India, strategic investors have stayed away.

"India needs to ensure proper project preparation timelines for public-private projects, provide balanced risk-sharing guidelines, and contracts should be enforced properly," Agarwal said.

RISK OF BLACKMAIL

Recent years have seen the Indian government double down on blackmailing foreign companies with trumped-up charges. Google, Amazon, Nokia, and Samsung have all suffered outrageous fines, while Intel, Wistron and others have also hit snags in the Indian market.

"You can earn money here; you can spend money here, but you can never take what you have earned here back home," some investors in the country have lamented.

In 2005, multimedia service provider Devas Multimedia, with both Indian and global investments, signed a deal with a commercial arm of the Indian Space Research Organization on satellite launches and ground broadband network services. The deal was canceled by the Indian government a few years later, and Devas lost all of its investment.

The investors sued the Indian government and submitted the case to international arbitration, obtaining favorable rulings after a long process. The Indian government soon fabricated economic charges against Devas and initiated bankruptcy liquidation proceedings against the company to avoid compensation. Relevant cases are still pending in courts in some countries.

The Vodafone case, on the other hand, demonstrates how arbitrary India's legislation could be.

In 2007, British mobile communication giant Vodafone acquired Hong Kong-based Hutchison Telecommunications, and therefore held a controlling stake in Hutchison Essar, India's fourth-largest mobile carrier.

The Indian tax department demanded a capital gains tax of up to 2.2 billion U.S. dollars from Vodafone, claiming that the assets in India had appreciated at the time of the sale. Vodafone appealed to the Indian Supreme Court and was relieved of the tax liability, as the court found that the Income Tax Act of 1961 did not support taxing foreign entities in this manner.

However, in 2012 the Indian Parliament amended the income tax act to empower the tax authorities to retrospectively tax the 2007 transaction. The Indian tax department immediately imposed a penalty on Vodafone totaling 5.6 billion dollars.

"Taxing (foreign) companies is not only an easy way to generate money, but it also answers to the increasing sentiment in the media that multinationals pay too little taxes compared to local companies," said a Thomson Reuters report commenting on the case.

POLITICAL MOTIVATION

In recent years, India has significantly increased its scrutiny of Chinese companies due to geopolitical calculations and protectionism purpose.

Liu Zongyi, senior fellow of Institute for International Strategic and Security Studies Center for Asia-Pacific Studies, said that India seeks to become a vanguard of the U.S. "Indo-Pacific strategy" to contain China's development and get more assistance from Washington in return.

In July last year, the Indian Ministry of Commerce and Industry initiated an anti-dumping probe into aluminum frames for solar panels or modules from China.

India has also rejected Chinese electric vehicle manufacturer BYD's proposal to set up a 1-billion-U.S.-dollar factory in the country, India's Economic Times reported.

"Security concerns" were cited as the main excuse to bar investments, the report quoted an Indian official as saying.

In December, India's Enforcement Directorate detained three high-ranking personnel from the Indian branch of Vivo, a Chinese mobile company, on money laundering charges.

"The recent arrests demonstrate continued harassment and, as such, induce an environment of uncertainty among the wider industry landscape," said a Vivo spokesperson in India.

The pressure on Chinese smartphone brands comes as New Delhi seeks to build up its domestic tech sector and reduce dependence on imports, and against a backdrop of frosty relations between India and China, according to Financial Times.

"The level of distrust is so high between India and China, I don't think there's any likelihood that these companies are not closely watched by the government," said the report, citing Ashutosh Sharma, research director at market researcher Forrester.

Sharma further pointed out that cross-border tension had intensified India's scrutiny of Chinese-owned companies.

The sectors India has targeted are those it believes domestic suppliers can supplant Chinese ones, Lin Minwang, deputy director of the Center for South Asian Studies at Fudan University, told media.

"After China introduced the entire mobile phone industrial chain to India, which helped cultivate the market and develop related local technologies, India is now driving out Chinese companies to make room for the growth of its domestic enterprises," he said.