New report by US says India is a “challenging place to do business”


India is one of the key investment hubs for the United States government. However, India under the Modi regime is growing as a challenging place to do business, according to a report by US State Department.

The report titled ‘2021 Investment Climate Statements: India’ which was released on last Wednesday, July 21, shows how US sees the business environment in India. Even as it noted India’s measures to liberalize foreign direct investments, it maintained that the country “remains a challenging place to do business” because of its protectionist policies.

Prepared by economic officers stationed in embassies and posts around the world these statements provide country-specific information on the business climates of more than 170 countries and economies.

“In the wake of Covid-19, India enacted ambitious structural economic reforms, including new labor codes and landmark agricultural sector reforms, that should help attract private and foreign direct investment,” the report noted.

“India, however, remains a challenging place to do business,” it said listing a litany of issues such as “new protectionist measures, including increased tariffs and procurement rules that limit competitive choices, sanitary and phytosanitary measures not based on science and Indian-specific standards not aligned with international standards, effectively closed off producers from global supply chains and restricted the expansion in bilateral trade,” the report said.

The State Department added that the US government continued to urge its Indian counterpart to reduce barriers to investment and bureaucratic hurdles.

The challenges, the report said, existed despite a slew of recent regulatory measures in India, “including new labor codes and landmark agricultural sector reforms”, which it felt would help the country attract private and foreign direct investment.

The Narendra Modi government has taken special pride in India’s improving rank on the Ease of Doing Business index, which is something the State Department’s report also highlights. As of 2019, India’s rank was 63rd out of 190 countries.

Despite the Invest India program, which regulates all foreign investment with a view to make it smoother, the US government feels that these processes can be non-transparent.

The US considers India an important trade partner in the region, an emerging market with great investment potential. As of 2019, US investments in India amounted to $45.9 billion, an increase of over 8% from the previous year.

It also said that while India followed a detailed process while formulating rules – via government authorities, cabinet approvals and sometimes even parliamentary debates – some were announced without any “consultative process”.

The report took particular note of the “equalization levy”, a tax that the Indian government announced in 2016 and then modified in 2020 to expand its scope. The equalization levy essentially taxes non-resident foreign digital businesses transacting with Indian-owned businesses in the country. It is meant to level the playing field for domestic businesses. The State Department said that this levy was introduced without “prior notification or an opportunity for public comment”.

A section of the report is dedicated to the Indian central bank’s rules for foreign financial institutions locally storing data of Indian investors and entities.

“[The] RBI policy overwhelmingly and disproportionately has affected US banks and investors, who depend on the free flow of data to both achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity,” it wrote.

India’s policy change has already impacted American Express, Citibank and Mastercard, who have been disallowed from issuing new cards in the country because they did not comply in time with data localisation norms.

It also raised concerns about the data protection Bill, which the State Government felt would greatly impact IT exports. “In the current draft no clear criteria for the classification of ‘critical personal data’ has been included,” it warned.

Added to this, it also flagged India’s new IT rules, which have wide-ranging ramifications for digital businesses in India.

“Reports on Non-Personal Data and the implementation of a New Information Technology Rule 2021 with Intermediary Guidelines and Digital Media Ethics Code added further uncertainty to how existing rules will interact with the PDPB and how non-personal data will be handled,” the report said.