5 minute read 8 Jun 2020
Key Investments move during COVID-19

Has COVID-19 made India a more favorable investment destination?

EY India
By EY India

Multidisciplinary professional services organization

5 minute read 8 Jun 2020
Related topics Tax COVID-19
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With its multifaceted industry initiatives, India may emerge as a globally preferred investment destination, if it is able to align to international standards of industrial support.

The outbreak of COVID-19 has brought a dramatic transformation to how businesses ideate and operate, forcing them to critically reassess their future plans. The outbreak happened at a time when the global economy was already showing signs of a slowdown. This has fueled anxiety among institutional investors and led to immense anticipation among them about government support to the industry. It is also becoming increasingly evident that this pandemic would continue to have repercussions in the foreseeable future. Investors now need to focus on effective planning more than ever before.

Here, we have briefly touched upon the key factors currently affecting investor mindsets and decision-making towards India as an investment destination.

The current geopolitical climate is causing a rejig of global investment destinations

Trade and industry mindset have shifted in recent years. Companies have increasingly started identifying Asia Pacific nations as manufacturing destinations. Among them, China has been a favorable destination in attracting investments due to its emergence as a global manufacturing hub.

The US-China trade conflict and Make in India are some of the agendas that institutional investors actively consider nowadays during strategic business discussions. Due to COVID- 19, many international investors with a manufacturing presence in China are facing unprecedented supply chain disruptions. News reports1 indicate that countries hitherto heavily dependent on China may now consider other manufacturing destinations. In fact, Japan has taken a step further by announcing a US$ 2 billion stimulus package to support Japanese investments moving out of China.

Owing these developments, a massive geographical rejig of manufacturing hubs seems likely. Several developing nations are emerging as vying contenders. India, with its multifaceted industry initiatives may emerge as a globally preferred investment destination, if it is able to align to international standards of industrial support.

Macro-economic scenario and incentives in India

Conventionally, institutional investors consider the availability of resources and infrastructure as key factors for investment decisions. However, the industry is currently experiencing an extraordinary liquidity crisis, further intensified by the currently prevailing lockdown in most countries. At such a time, any form of government support to keep operations afloat is a welcome measure. Generally, this support is extended by way of economic reforms and infrastructural support or fiscal incentives. Both have a direct positive impact on investor cash flows. Let’s take a closer look at these factors.

  • Macroeconomic reforms and infrastructural support

    In India, the current situation has created additional stress on core sectors such as banking, financial services, power and telecom and also revealed some glaring deficiencies. The strength of these sectors determines the extent to which industries flourish. Further, to enable the industry, the government announced some ambitious measures such as:

    i)  Creation of dedicated National Investment and Manufacturing Zones (NIMZ) and focus on industrial corridors which would serve as fully enabled plug and play facilities for manufacturing activities

    ii)  Creation of dedicated Coastal Economic Zones/ Units (CEZ/CEU) and industrial corridors to enable logistical ease

    The steady implementation of several such initiatives led to a jump in India’s Ease of Doing Business (EODB) ranking from 140 to 63 in October 2019. The implementation of these initiatives is likely to gain further momentum in the coming days.

  • Industrial incentives in India

    The Government of India took cognizance of investor needs and launched the noteworthy Make in India initiative, which has been quite successful. Multiple incentives schemes at the central and state levels were introduced under this flagship initiative. Further, a reduced income tax rate of 15% for new manufacturing companies was introduced to bring India at par with other developing nations. These initiatives have been applauded by domestic and foreign investors alike.

    Recently, some lucrative incentives schemes for electronics manufacturers were also introduced, and are generating considerable interest. Similar initiatives for other sectors are also envisaged. The pandemic has also placed the limelight on sectors such as healthcare, retail etc. Incentives are also being announced to promote these sectors. For example, the state of Tamil Nadu has introduced fiscal incentives for the manufacture of drugs and equipment employed in the management of COVID- 19.

Thus, while it appears that too much is changing too fast, this may just be just the tip of the iceberg. Investor agility is now of paramount importance. Investors may lay higher emphasis on quicker returns now. Hence, infrastructure and incentives support assume even higher importance in decision making. At the same time, it is also foreseen that investors may adapt a cautious approach, leading to growth concentration in a few sectors.

The need of the hour is empathetic, pointed relief measures for industry.

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(This article is written by Bhavesh Thakkar, Tax Partner, EY India.)

Summary

As a nation, India should look beyond the current methodology and rapidly enable a unified approach where the center and state collectively work to build and sustain industry. Such measures are the key and may ensure that India adapts well to the geopolitical climate of tomorrow.

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EY India
By EY India

Multidisciplinary professional services organization

Related topics Tax COVID-19
Upvote