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'Uncertainty Of The Tax Code Is A Dampener'

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Several questions around India’s growth have been raised especially in context of the foreign investors’ interest in the country. Deloitte's Vassi Naidoo, who was in India with the delegation travelling with British Prime Minister David Cameron, says India shouldn't merely depend on FDI alone, but also look at FIIs investing in the country. Naidoo also emphasises that emerging middle class will drive the growth story in the country. The UK-based accounting firm's Vassi Naidoo, Deloitte’s vice chairman, International Markets and Lead Partner, Africa and India Services Groups, speaks to BW’s Sachin Dave about the macro picture of growth and development from point of view of foreign investors.
 
How does the foreign investment community view the coming 3-5 years of Indian economy?
From an India perspective, I am very positive notwithstanding the past. Even though the growth rate of India is now down to 5 per cent, an emerging middle class will grow at unprecedented rate, and research done by the OECD supports this. The middle class would drive the consumption in the country. If you believe in that hypothesis then you are going to find this middle class demanding quality products and will ensure that the services offered to them are of a certain quality and acceptable to their standing in the society. That is not to say that the people in the last 10 years did not demand that but it’s a relative gain.
 
If you look at 2009 the relative number of middle class in top 20 emerging countries in the world according to the OECD research (The Emerging Middle Class in Developing countries, Homi Kharas OECD Development Centre), India stood at 0 per cent. In 2020, OECD is estimating that the number of middle class in India would be 11 per cent of the total middle class in these emerging countries and by 2030 India would lead the table with 23 per cent middle class of the total global middle class.
 
It is interesting that China had 38 per cent of the total middle class in these countries in 2009 but about 29 per cent in 2020 and 20 per cent in 2030. We completely believe in this outcome and that this is a big opportunity to be availed in India. This group of people needs to be serviced that is the local demand. In sectors such as healthcare, financial services, infrastructure and education there is going to be unprecedented growth.
 
As far as the foreign direct investment (FDI) coming to India from UK is concerned, how is the mood in the investment community?
A. FDI will come when other aspects of regulation also change not just the ownership. In other words it should be policy certainty in taxation and it has to be part of the bigger plan. If you look at the retail sector, there again it is quite confusing as India is the only country in the world that has coined this phrase of multi brand retail. Nobody in the world talks about multi brand retail. There is so much of red tape around that I think it is kind of dysfunctional. And the reality is that the middle class in India they are going to demand the retail goods that they would aspire for. So, there is going to be this push to rethink these regulations. I would say that the sentiment from the businessmen is very positive and the level of confidence to come to India is there. FDI is going to come but we should not depend on mere FDI but look at foreign institutional investors looking at the country. So it’s going to be a combination of FDI and FII. However, there are lots of opportunities in India for the foreign investors despite the regulation and policy making.
 
The recent issues around Vodafone or other big companies like Nokia regarding the retrospective tax a dampener for FDI?
The dampener is not the individual case but the uncertainty of the application of the policy and uncertainty of the tax code. It is my view that this is something that needs to be resolved.
 
Many Indian companies have invested in the UK in past five years, how do you view outbound investment from India?
I see that the FDI from India will continue because there are large global business houses already present in India. There are seeking opportunities on the global basis and particularly in sectors that are going satisfy the growing domestic demand. You can look at the power sector or coal or other resources and I think that this trend would continue especially in these sectors. There is significant amount of reverse innovation that could be learnt from the Indian companies. You have to look at the automotive sector like the turnaround of the Jaguar Land Rover (JLR). These guys from India are coming to UK and doing it better than many companies in UK.
 
If we can name two points that investors in the UK would want to change in India, which would eventually lead to more inward investment?
The first one is the regulation, certainty of regulation. Then it is the tax code and certainty of a stable tax regime.
 
Where does India stand in the scheme of things for institutional investors or UK companies wanting to invest outside their country?
In terms of a choice of doing business traditional choice was China. Then investors also looked at South America, Brazil in particular. But what I think what has happened particularly after this visit of the British Prime Minister David Cameron, is positioning India in the minds of investors from UK especially in terms of consumption capacity that the country (India) is going to have. After India however I think Africa is going to be of importance and companies from UK along with Indian ones can together invest in African countries.
 
A lot of Indian companies have been in Africa for many years, Tata being one of them. So, you are going to have a resource play but Africa is also going to demand the value added job creating within Africa. Look at South Africa, that economy is booming because of the middle class that has been created in past 18 years. Only 18 years ago you had a white middle class but now you have got a diverse middle class. The story of South Africa is more or less similar to that of India but for the sheer size of the latter.
 
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