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India is trying hard to woo foreign investors as the nation tries to rebuild from its worst economic contraction on record. Hit particularly hard by the COVID-19 pandemic, the Indian economy is projected to record a 7.7 percent decline in the financial year ending this month–the single largest drop in the nation’s history. One sector that is ripe for foreign investment is India’s energy industry. The International Energy Agency, in its annual “India Energy Outlook 2021” report, remarked that “the scope for further growth in energy demand and infrastructure is huge” and that as India recovers from the devastating impact of the novel coronavirus the subcontinent is “re-entering a very dynamic period in its energy development.” India’s middle class is expanding rapidly and so too is the country’s energy demand, which has doubled since 2000. For the moment, 80% of this demand is still being met with high-emissions fossil fuels but India has high ambitions for clean energy infrastructure and the market is highly promising for renewables.
“India will soon become the world’s most populous country, adding the equivalent of a city the size of Los Angeles to its urban population each year,” the IEA report continued. “To meet growth in electricity demand over the next twenty years, India will need to add a power system the size of the European Union to what it has now.” The opportunity to get in on the ground floor will likely hold a lot of luster for foreign energy firms.
India is opening up more and more sectors to foreign direct investment (FDI), with recent additions including the insurance industry, new special outlays for manufacturing, infrastructure, and textiles, and freshly relaxed FDI standards in key sectors such as coal mining, contract manufacturing, and single-brand retail trading. With these moves, India is hoping to woo investors away from China or to be the landing ground of companies looking to diversify their Chinese holdings with a “China plus one” strategy.
China, at least as compared to India, has managed to emerge from the pandemic relatively unscathed in economic terms and even managed to achieve the distinction of being the only major economy to eke out a bit of economic growth in 2020, albeit at a much lower rate than Beijing had hoped.
While there are undoubtedly plenty of companies that would like to move a few eggs out of their made-in-China baskets, however, India has some major hurdles to clear in order to become the desirable destination for overseas dollars that they would so like to be.
At the moment, New Delhi is embroiled in two high-profile legal battles with overseas companies for illegal and allegedly illegal retrospective tax claims. In 2012, the Indian government changed the country’s tax code, giving New Delhi enhanced authority to claim back taxes for deals struck years before that concerned assets located in India. In 2014, the country demanded a whopping 102 billion rupees (US$1.4 billion) from British oil and gas firm Cairn Energy, a claim which was contested and then overturned in December. Back in September India lost a similar arbitration case against telecoms giant Vodafone over a US$2 billion retrospective tax claim. Both claims were found to be in violation of trade treaties. While entirely possible that the terms of these treaties were a little too friendly toward these foreign companies for India’s own good, the optics are decidedly bad for New Delhi at a time that they need to be wooing foreign firms, not scaring them away with bureaucratic and trade volatility.
Ultimately, New Delhi would do well to keep making India an attractive country for FDI as their energy and infrastructure needs continue to grow at a breakneck pace. “An expanding economy, population, urbanisation and industrialisation mean that India sees the largest increase in energy demand of any country, across all of our scenarios to 2040,” reports the IEA. While the nation has experienced some considerable speed bumps in 2020 with the pandemic and high-profile litigation that will certainly serve as a red flag to prospective investors, the potential benefits for those getting into the Indian energy game are massive.
