06 July By: | Category:

A new report by the U.S. State Department on the investment climate in India says Prime Minister Narendra Modi’s government has been slow to propose economic policy changes to match the “rhetoric” that followed his landslide electoral victory two years ago.

The State Department notes that the government failed to muster sufficient support to change land-acquisition rules and is still struggling to push a major tax-simplification plan through Parliament.

“This has resulted in many investors retreating slightly from their once forward-leaning support” for Mr. Modi’s government, the report says.

Aimed at guiding U.S. investors, the report also sounds a note of caution on the South Asian country’s world-beating economic-growth numbers, partly the result of changes to the way statisticians compute gross domestic product.

“Ostensibly, India is one of the fastest growing countries in the world, but this depressed investor sentiment suggests the approximately 7.5% growth rate may be overstated,” the report says.

The report lauds Mr. Modi’s government for being “generally friendly” to foreign direct investment, noting that it has eased restrictions in many sectors, most recently in civil aviation, defense, certain sectors of e-commerce, and pharmaceuticals.

But “many sectors of the economy retain equity limits for foreign capital, which has proven to be a deterrent to investment,” it says.

For instance, in the insurance sector, the maximum foreign ownership allowed was raised to 49% from 26%, but the rules still mandate that management and control of insurance companies be retained by Indians.

In multi-brand retail too, “the government has taken an anti-FDI stance,” it says, noting that while the BJP is considered pro-business, much of its constituency comprises shop and other small business owners who could potentially suffer losses under a liberalized regime.

Still, the report says, India isn’t a destination that foreign companies can afford to miss, given the massive $1.5 trillion to $2 trillion of infrastructure development planned in the country over the next 5-7 years.

“Despite the challenges, the opportunities are immense for foreign companies operating in India, although many highlight that success requires a long-term planning horizon and a state-by-state strategy to adapt to the complexity and diversity of India’s markets,” it says.