The previous two terms have already seen substantial improvements in India’s ease of doing business ranking, and further reforms in tax policies, labour laws and property registration are anticipated. Investments in infrastructure such as in transportation, logistics, and urban development are expected to continue, too.

The Modi government is also expected to focus on attracting foreign direct investment (FDI) by opening more sectors to foreign investors, offering incentives and liberalising norms in areas like defence, railways and insurance. Strengthening trade relations, signing new trade agreements and participating actively in international economic forums are likely priorities.

The government is anticipated to simplify the tax structure, ensuring a stable regulatory environment, and promote new technologies like artificial intelligence, blockchain and fintech to foster a dynamic and innovative business environment. However, challenges such as job creation, managing inflation and addressing income inequality will remain crucial areas for the government to address.

In summary, the Modi government is expected to continue its trajectory of economic reforms and policies to enhance India’s attractiveness as a foreign investment destination and improve the ease of doing business. The Union Budget of India for 2024 provides strong indications of these future policy directions.

Proposed budget reforms

On 23 July 2024, Finance Minister Nirmala Sitharaman unveiled the 2024 budget, which has removed several barriers for foreign investors, making it easier to invest in India. Developed economies are often saturated, offering limited returns on investment, whereas developing nations like India are experiencing unparalleled growth.

For example, the US had real GDP growth of 2.5% in 2023, while India achieved 7% real GDP growth even during the pandemic (FY2021-2022). Previously, India’s strict regulatory framework was a significant obstacle for foreign investors. Recognising this, the Modi government has implemented extensive regulatory reforms in the past decade to create a more investment-friendly environment. Following are some key 2024 budget reforms.

Abolition of angel tax. Indian startups in the past few years have innovated extensively in spaces like AI, online retail, software, etc. However, startups need angel investors to provide the seed capital to go from being good ideas on a drawing board to profitable companies. India previously had an “angel tax” that was imposed on angel investors when the investment exceeded the fair market value of the startup’s shares. This proved anathema to investors in Indian startups, deferring potential investments, and so has now been abolished.

Reduction in corporate tax. The government, in order to provide an equitable ground to foreign companies operating in India, has proposed to reduce the corporate tax applicable to foreign companies, from 40% to 35%. A reduction in corporate tax rates for foreign companies appears to be in line with the government’s goal to steer India towards a USD5 trillion economy by attracting foreign capital.

Removal of equalisation levy. The equalisation levy was an additional charge of 2% that was, until now, imposed on digital companies operating without a physical presence in India, purportedly to ensure a level playing field with Indian e-commerce firms. Responding to feedback from the industry, the government has decided to remove the levy, increasing the incentive for foreign companies providing services such as software-as-a-service, online education, e-commerce etc., to do business in India.

Expansion of safe harbour rules. The government also proposed to expand the scope of safe harbour rules and make them more attractive to investors, as well as streamlining the transfer pricing assessment procedure. A safe harbour rate is a fixed tax rate that is meant to simplify tax compliance. With a view to reduce litigation and provide certainty in international taxation, the government has proposed to provide a safe harbour rate for foreign mining companies selling uncut diamonds in India. It is expected that such safe harbour rates will eventually be rolled out in other industries as well.

Tariff reductions and Customs Act amendments. Investors looking to do business outside their home country are always fearful of tariffs imposed on imports. Rightly so, for tariffs can be disastrous for international trade and for attracting investment into a country. It is not without the reason that the economist Henry George once observed: “In time of peace we do to ourselves by tariffs what we do to our enemy in time of war.” India has had a history of relying on tariffs and India’s international trade has suffered because of it.

Recognising this, in the budget the government has slashed tariffs for various key sectors including agricultural products, manufacturing inputs, critical minerals such as heavy metals and silicon, cancer drugs and precious metals (including gold, silver and platinum), textiles and leather, copper, steel and medical equipment, making importing these products into India much more economically viable. This has been accompanied by amendments to the Customs Act, 1962 to make importing goods into India easier.

Simplification of FDI rules. The finance minister has also announced that the rules and regulations in relation to FDI and overseas investment will be simplified to facilitate FDI and promote opportunities for using the rupee as a currency for overseas investments. Until now, FDI has been restricted in strategic or sensitive sectors, but the government is easing restrictive regulations to attract foreign investors.

The finance minister also stated in her budget speech that the government is currently working on a “Jan Vishwas Bill 2.0”. The original Jan Vishwas Act of 2023 led to amendments in 183 provisions across 42 Indian legislations decriminalising and rationalising offences in sectors as varied as agriculture and media and publishing, significantly boosting the ease of doing business and enhancing trust-based governance. Expectations of the Jan Vishwas Bill 2.0 will accordingly be high. The government also intends to incentivise Indian states to implement business reform action plans and increase digitalisation to further facilitate business and foreign investment in India.

Renewable energy incentives. The finance minister also announced that the government will soon offer a renewable energy incentive policy for pumped storage. Investing in renewable energy is becoming more popular with the rise of using Environmental, Social and Governance (ESG) frameworks to measure business success, as well as more conventional metrics. Investors are looking to invest in such environmentally and socially aware sectors, and renewable energy is one of the most profitable choices.

India is gearing up to be a major investment destination for renewable energy and a policy to spur investment in the sector stands as in stark contrast to many nations that have been reluctant, if not outright opposed, to renewable energy investment. Perhaps the most interesting subset of the renewable energy industry is nuclear energy. The recent rise in popularity of small modular nuclear reactors has completely revitalised a decades-old industry and is attracting renewed interest among investors.

The Indian government has identified this, and thus as part of the budget, the finance minister announced that the government is looking into entering into public-private partnerships to build small, modular nuclear reactors as a promising investment opportunity for foreign players, especially for companies that have expertise with nuclear technology in their local jurisdictions.

Conclusion

In an era where globalisation is often met with scepticism and protectionism, the Modi government remains committed to international trade and investment as paths to growth and prosperity. The 2024 budget and the re-election of Modi are likely to reinforce investor confidence and drive foreign investment in India.

The anticipated continuity in economic and policy reforms, along with targeted initiatives in infrastructure, digital transformation and sustainability, position India as an increasingly attractive destination for global investors.

This article was originally published in Asia Business Law Journal on 21 October 2024 Co-written by: Shruti Kinra, Partner; Mragank Shukla, Associate. Click here for original article

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