India, one of the world’s fastest-growing economies, stands at a crucial juncture. With its strategic geopolitical significance, rapidly growing economy, and dynamic business environment, India continues to present a myriad of investment opportunities. Morgan Lewis joined with Michael Harrington and Aryaman Bhatnagar from Control Risks, a global specialist risk consultancy, for a discussion on the complexities of investing in India, especially in the context of the recently concluded general elections.
In recent years, the Indian government has tried to attract more investment, including as an alternative to China. The Indian government has been particularly keen to promote manufacturing in India. India has increasingly become an attractive manufacturing hub for technology, engineering, automotive, pharmaceuticals, and consumer durables, and is set to continue growing as the government drives forward incentives for investment and as states within India compete to attract interest from foreign investors. One example is the successful “Make in India” initiative launched by the Indian government in 2014 to promote investment, encourage innovation, enhance skill development, protect intellectual property, and create manufacturing infrastructure.
India is currently well placed to develop its manufacturing sector. Investors know India better than ever and are more experienced in due diligence and managing risks. Economic growth has averaged 6% since liberalisation in the 1990s, and recently there has been improved political stability. The creation of a coalition government is not expected to dent investor confidence, and there is an expectation that the coalition government will continue to strive to make India attractive for investment.
Within India there are regional differences around how investments operate. For example, Andhra Pradesh has been a hub for tech investment for some time and looks likely to continue to be so, and Hyderabad is especially attractive in areas such as semi-conductors and laptop and mobile manufacturing. Expect to see more growth in these geographic areas in the next five years. The sectors with the most potential include technology, manufacturing, food processing, pharmaceuticals, textiles, and automotive. Infrastructure projects are also looking positive, especially with the recent emphasis on renewable energy.
One area of notable recent development that applies to India as much as anywhere else is Artificial Intelligence (AI). The Indian government is currently evaluating its AI policy and strategy, and we are anticipating a new privacy law and updates to the Digital India Act 2023.
With private equity and venture capital investments, there has been a shift in the last few years towards buyouts and control stake investments. Previously, investors tended to acquire minority stakes, which made exits more challenging. In recent years, the positive record of highly successful PE and venture capital exits via strategic sales, secondary sales, and IPOs makes India even more attractive to these investors.
There remain, however, challenges. The coalition government may struggle to push through reforms, such as the simplification of land acquisition. Expanding plants can be difficult and slow due to challenging land acquisition laws. The government is looking to address this, as it is also looking to introduce stronger intellectual property rights protection.
However, the largest risks relate to fraud and corruption. These range from high-level corruption to lower-level facilitation payments, which can pose reputational risks or scrutiny under anti-bribery and corruption laws such as the Foreign Corrupt Practices Act (FCPA). Other related challenges include political exposure, whereby a local partner is affiliated with one political side or another, and a business can find itself on the wrong side of a political divide. The answer to these sorts of risks is good governance and robust due diligence of local stakeholders. Regulatory uncertainties remain a risk, but the stability provided by the continuation of the current government mitigates this.