Richard Heald: CEO’s February newsletter
UK India Business Council CEO Richard Heald gives his take on developments in the UK-India relationship over the past month, looking forward to February and the months ahead
It used to be said in London that buses would either never arrive or they would all arrive at once…
The rush of recent weeks has been rather similar. More clarity on Brexit, the election and inauguration of President Trump, the passage of GST, demonetisation and the critical upcoming Uttar Pradesh election are all significant events that should cause us all to pause, reflect and assimilate.
The Union Budget will be delivered tomorrow against this background (and more). We expect that it will be a mildly expansionary budget to counter the short-term effects of demonetisation. There is a general expectation that there will be slowdown. Indeed, The IMF has slashed 1% off their growth numbers for India to 6.6%pa; the World Bank has reduced their estimates by 0.5% to 7.0% pa. And, undoubtedly, there has been a short-term shock to the system, which has been felt particularly hard in the consumer and Fast Moving Consumer Goods (FMCG) sectors.
As such we expect Minister Jaitley to give himself some leeway with a relaxation in his previously announced fiscal targets. Indications are that increasing the previously stated two year 3% budget deficit target to say, 3.4% of GDP, would allow the government to increase its spend on infrastructure projects. While this should not be a concern per se, the Ministry of Finance’s figures are based on key assumptions in nominal GDP growth and are dependent on significant variables – the price of oil, inflation and the introduction of the Goods and Services Tax (GST) in mid-2017.
Setting aside the remarkable acceptance of the pain of demonetisation, there is an underlying strategy which is fundamentally sound, and which we applaud. Namely, that the introduction of greater transparency in the way the Indian economy works by moving transactions involving individuals, the private sector and the public sector onto a digital platform.
This is a major step forward in relation to the ease of doing business in India as the transparency brought by digitisation allows the organised and informal corporate sectors to compete on a more level playing field. Moreover, the potential of increasing and improving government finances through a more visible potential tax pool is immense. These are exactly the steps that need to be taken as India grows into one of the world’s largest economies during this century.
India watchers will know that the level of activity amongst the chattering classes around the time of the Union Budget is huge. For the first time, the UKIBC, together with CBI, poll our members as to what they would like to see from the Union Budget. Taken together, the contributions from the 85 companies who responded were constructive. The resulting 132-page submission was commended to Minister Jaitley by our Chair, Rt Hon Patricia Hewitt and Carolyn Fairbairn, Director General of Confederation of British Industry.
The submission highlighted 4 key themes:
- that the Indian Government should continue to strive to make the operating environment more competitive, with specific focus on the levels of corporation tax and the impact of Dividend Distribution Tax;
- that Goods and Services Tax should be rolled out in as uniform, smooth, and fair way across sectors as is possible;
- that the Indian Government should work towards a simpler, fairer, and more predictable tax regime that encourages investment in important sectors such as finance, beverages, investment services, insurance, defence, oil and energy and digital and telecommunications; and,
- a request that the Indian Government give more definition and medium -term clarity on areas of major Government expenditure e.g. in defence and infrastructure so as to enhance investment decisions.
At the same time, there was a televised panel discussion between UK businesses in India organised by UKIBC. The participants had an animated discussion across a wide range of Budget related and more general economic points.
And all of this is taking place against the background of impending elections in 5 states. The election in Uttar Pradesh, with its 250 million inhabitants, is a critical event ahead of the General Election in 2019. Prime Minister Modi and the BJP swept the board in the 2014 Union Election. The announcement of the State result on 11th March is a forecast as to how the NDAs’ prospects may pan out at a national level in two years time. Option polls are notoriously unreliable, no more so than in India. Currently they should give the BJP some degree of optimism. Ultimately however, informed sources are looking to whether the opposition parties can achieve some degree of alliance which, at this late stage, is unlikely.
There remains much discussion and enquiry around the topic of Brexit. Prime Minister Theresa May has been more explicit as to the process and has said that a White Paper will be published outlining further details. Despite the uncertainty, UK companies continue to trade and do business with India. Indeed, our second Annual Ease of Doing Business Survey demonstrates continued optimism as to the trade prospects, with 52% of respondents feeling that it is becoming easier to do business in India. Not surprisingly, GST was identified as the single most effective reform in this process. Key areas of strength in India were ranked in area of priority as “availability of skilled labour”, “telecoms facilities”, “availability of support and service providers”. Power and ease of getting a connection continued to be seen an issue.
A copy of the full report can be accessed here.
The first week of President Trump’s administration demonstrates the changing and unpredictable dynamics that increasingly exist in international trade and is no doubt weighing heavily on Minister Jaitley’s mind. The interplay of potential corporate tax reductions, increased import tariffs as well as more rigorous visa policy is already having a very profound impact. It is reported that Indian BPOs are already examining their plans. The 300,000 to 350,00-Indian H1B visa holders in USA are voicing disquiet.
The statements and actions out of the White House are startling. They fly in the face of previous conventional wisdom. It is entirely possible that the result of President Trump’s statements is that products made by US companies exporting or indeed manufacturing in India become more expensive and less competitive. And all of this is happening against the background of Industrial Revolution 4.0.
Personally, I believe this plays to the UK’s strengths in relation to India, in that we can offer what India wants, how India wants it, and at a price India wants. At the same time, I realise that nothing is guaranteed, and that in commerce a judgement of risk is key.
At the end of the day, succeeding in India is all about intelligence, judgement and risk. The UK India Business Council is here to help.
Busses may come en masse. The key is to get on the one that takes you where you need to go to.