Swiss companies are waiting with bated breath for details of the highly anticipated economic agenda from the new Indian government led by Narendra Modi. But how fast can Modi move to liberalise the economy, tackle corruption and revive talks on a free trade accord?This content was published on May 28, 2014 - 11:00
India is viewed as one of the most exciting markets in the world by many Swiss companies, but one that has not lived up to its true potential. Economic growth has dipped in the last two years while inflation has risen amid mixed messages about reforms that could open up the country further to foreign investment.
Having enjoyed several boom years, Switzerland’s exports to India sank 11% in 2012 and a further 24% last year as rapid Indian economic growth ran out of steam (see infobox).
But Modi has caught the eye of Swiss companies operating in India after transforming Gujarat into a foreign business-friendly market during his time as chief minister of the state.
“Given the work Modi has done in Gujarat, there are high expectations from the business community that he can revive the national economy,” Mohinder Nayyer, a Delhi-based economic advisor to Swiss businesses at Switzerland Global Enterprise (s-ge), told swissinfo.ch.
More than 200 Swiss companies are present in India, either with their own operations or through joint ventures with Indian firms.
The main sectors represented are pharmaceuticals, chemicals, machinery and precision engineering.
Together they employ around 100,000 people in India.
Foreign direct investment (FDI) from Switzerland to India totaled CHF7.5 billion in 2012, 25% down from the record CHF9.96 billion in 2010.
Exports also fell 11% in 2012 and a further 24% last year to CHF2 billion.
However, Swiss exports achieved double digit growth for most years between 2005 and 2011.
Imports from India to Switzerland gained 6% last year to reach CHF1.5 billion, giving Switzerland a CHF500 million trade surplus.End of insertion
Indians also have high expectations and have been moved to post-election levels of “euphoria”, an audience of business leaders at the Swiss-Indian Chamber of Commerce heard at a recent presentation in Zurich.
But former Swiss ambassador to India Philippe Welti warned attendees that despite the landslide victory for Modi’s Bharatiya Janata Party (BJP) “it could be very difficult to put forward a liberal economic programme” that is expected to be unveiled in July.
Reinvigorating India’s stalled economy will necessitate tough reforms affecting agricultural workers, the welfare system and the country’s bloated bureaucratic cadre. “People don’t often live with sacrifices imposed on them for the sake of long-term benefits,” Welti said.
But even a few modest changes could make a big difference for foreign companies investing in India, according to s-ge’s Nayyar. Swiss firms will be keeping a close eye on corporate tax reforms and raising ownership restrictions on local companies during takeovers.
“Generally speaking, foreign direct investment is not restricted but it faces more of a problem of implementation. For example, acquiring land is very complicated,” said Nayyer. “The challenge for the new government is to improve the implementation phase to make the country more attractive for foreign investors.”
Hold-ups at border customs offices and other red tape delays can also prove frustrating to exporters. “Our products are highly specialized and technical,” Conrad Sonderegger, sales director at Kistler - a Swiss firm that makes sensors and measuring systems - told swissinfo.ch. “If they need maintenance it is sometimes better to bring them back to Switzerland, but the paperwork involved is not always straightforward.”
The three Indian elephants sitting in the room for Swiss firms are the issues of corruption, the failed free trade agreement (FTA) and an unresolved tax evasion spat with the previous government.
Much of the talk on the sidelines of the Swiss-Indian Chamber of Commerce meeting centred on how Modi will tackle a culture of petty corruption that extends from politicians to local official all the way to ordinary people on the street.
None of the audience was under any illusion that the problem could be sorted out straight away. “If you know what form corruption takes and how pervasive it is, you can find ways of dealing with it,” one executive, who did not want to be named, told swissinfo.ch. “The real problem is when corruption changes and suddenly manifests itself in a different form.”
“Modi should tackle the problem from the top down,” said another. “If the government can be seen as incorruptible it would send a good message down the chain to others.”
Given the size and scope of issues that the new government now faces – from building up the transport infrastructure to fixing a disconnect between power stations and coal supplies and keeping a lid on a potentially volatile mix of religions – some observers feel that India will push the FTA to the side for the time being.
Their concerns about tax evasion were addressed by Modi’s new government earlier this week when it set up a new investigation team to “bring back black money,” according to Law Minister Ravi Shankar Prasad.
At present there are no obvious signs that the FTA between India and Switzerland, together with the other European Free Trade Association (EFTA) states of Iceland, Liechtenstein and Norway, will be revived after stalling earlier this year.
“Both governments keep saying the FTA will be concluded by the end of the year, but they never say which year,” quipped former ambassador Welti at the chamber of commerce meeting.
Sudhir Kapadia of Ernst & Young India told the gathered executives that the new Indian administration was unlikely to immediately take up the cudgels of the previous government which had vociferously called on Switzerland to hand over the names of tax cheats in the build-up to the recent election.
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