Economic overview
According to the International Monetary Fund (IMF), the Indian economy grew by 9.5% in 2021, after the deep contraction of 2020, when the Gross Domestic Product (GDP) had collapsed by 7.3%. In absolute value, the Indian GDP was, in September 2021, about half a percentage point higher than the pre-pandemic levels. Also according to IMF estimates, the rebound should continue in 2022, with an expected growth of 8.5%. In light of the catastrophic second wave of Covid-19 in April-May 2021 – which cost the lives, according to the Economist, about 2.4 million people – the rebound of the Indian economy is certainly a remarkable achievement. However, if we go beyond aggregate macroeconomic data, it is clear that Narendra Modi’s government strategy to get the country out of the pandemic is contradictory on the one hand and slippery on the other.
The first strategy apparently adopted by the Indian government to put the country back on a sustained growth trajectory involves the negotiation of a series of free trade agreements. A strategy marked by notable contradictions. In May 2021, the Modi government announced the resumption of negotiations with the European Union – stopped since 2013 – and, in January 2022, the start of work on an agreement with the United Kingdom. Both agreements, however, will not lead to tangible results, at least in the short term.
On the one hand, the points of divergence with the European Union that led to the interruption of the negotiations in 2013 remain substantially unchanged. On the other hand, the 2022 end date for signing an interim agreement with the UK is unrealistic. Australia and India aim to sign an interim agreement by the same date, but after nine years of negotiations. Furthermore, the positions of the United Kingdom and India remain distant, especially on the issue of the relaxation of immigration rules to Great Britain. India insists on a substantial enlargement of the mesh in exchange for an opening to UK products and services, but a substantial part of the British Conservative party – including Home Secretary Priti Patel – has no plans to give up on a question of crucial importance for the hard core of its constituents.
Looking further, it is clear that the Modi government has even less appetite for the liberalization of the Indian economy than its predecessors did. Between 2004 and 2014, when the prime minister was Manmohan Singh, India signed 11 free trade agreements.
Main sectors of industry
The eight “core” sectors of Indian industry – coal, crude oil, natural gas, refined petroleum products, fertilizers, steel, cement, electricity – combined production growth of 5.8 percent year-on-year in February. against -3.3 per cent in the same month last year and four per cent in January (revised estimate from the previous 3.7 per cent). This is the highest rate in four months. This was announced by the Ministry of Commerce and Industry of India. Coal (6.6 per cent), natural gas (12.5), refined petroleum products (8.8), steel (5.7), cement (5) and electricity (4) closed with positive signs; with negative signs crude oil (-2.2 per cent) and fertilizers (-1.4). The eight sectors make up 40.27 percent of the industrial production index. Of the eight sectors in percentage terms, coal accounts for 10.33 per cent, crude oil for 8.98, natural gas for 6.88, refined petroleum products for 28.04, fertilizers for 2.63, steel for 17.92, cement for 5.37 and electricity for 19.85.
Modi in September 2014 inaugurated “Make in India”, a marketing campaign with which entrepreneurs and companies from all over the world are invited to invest, to establish their own factories and to open industrial centers in the Asian country.
There are several reasons that led Modi to focus on manufacturing:
currently the sector contributes only 17% of national GDP, a figure considered too low compared to 69% of services and 14% of agriculture
and altogether 100 million Indians work in the same sector, compared to 232 million who work in agriculture and 142 million who work in services.
India, according to the Prime Minister, if it really wants to be able to compete with China must do much more, especially considering that China itself, according to data reported by Justin Lin (former Chief Economist of the World Bank ), could lose 85 million jobs in the manufacturing sector, due to the rapid rise in wages.
The following are the objectives that “Make in India” sets itself:
to guide development towards a model oriented to high-intensity production and no longer to services;
transform the economy of the Subcontinent into a global industrial center;
increase manufacturing growth by at least 10%;
create 10 million jobs (of which at least 125,000 within the next twelve months);
increase the number of foreign factories and investment in infrastructure.
Modi’s ambitious project follows the successful model of Gujarat, the northwestern state of which the current Premier was Governor: over the past few years, Gujarat has managed to attract a large number of local and international investors who in Ahmedabad and surroundings have relocated their businesses. Today, 16% of all production in the country is concentrated here and, not surprisingly, the Economist had defined the north-western state as “the industrial locomotive of India”.
Taxation for businesses in India
Resident companies, i.e. those established in India or actually managed there, are taxed on all income from any source, while non-resident companies only on those of Indian source.
Taxable income is given by the aggregation of the different types of income, namely: income from business or professional activities, capital gains, land income and other income. With the exception of business income, the other categories follow the same rules as individuals.
The income from entrepreneurial activity is based on the result of the income statement, to which changes are made relating to the presence of exempt income, non-deductible expenses, special deductions and other indicated by law.
Depreciation is carried out according to the percentages provided for each category. For new plant and machinery destined for manufacturing companies, the depreciable value has increased by 20%, which becomes 35% for factories located in some States. An additional 15% deduction is provided for the year of actual installation of the plants and machinery for investments exceeding 250 million rupees. Interest on debts inherent to economic activity are generally deductible from income if they do not exceed market values. Interest for debts contracted for the acquisition of new machinery and plants can only be deducted from the year of actual installation of the same, the amounts previously paid will be capitalized at the fixed asset value.
Losses related to business activity can be offset with profits from other income categories in the year in which they are generated or carried forward for a period of eight years but only to offset profits in business activity.
The level of taxation is given by a base rate to which surcharges are added depending on the income produced. The basic rate for resident companies is 25% if you have revenues of less than 500 million rupees and 30% for higher revenues, while for non-resident companies it is 40% regardless of revenues.
Investing in India
Today India is the second country in the world in terms of population, but by 2050 it should overtake China and reach 1.6 billion people. With 30% of the population under the age of 14, this is how India is a country full of opportunities for those who know how to seize.
Furthermore, the GDP expansion figures are absolutely sensational: we are talking about an annual growth of more than 5% – 6%, levels much faster than those managed by developed economies.
The economic growth of the country is potentially enormous, the knowledge of the English language by its inhabitants is a great advantage to open up to the world, the very competitive labor costs make this country the “homeland” for outsourcing.
The latest economic reforms carried out by Prime Minister Manmohan Singh (who trained outside his country, first in Oxford, then at the UN and the IMF) are at the forefront and the results are visible. The focus is on the green economy, the recovery of domestic consumption and the brick market (it is said that Donald Trump is also investing in India).
The International Monetary Fund has released forecasts that in the coming years India will grow more than China, becoming the fastest economy in the world.
To date, import duties weigh heavily, which exceed 30% of the cost of the asset, as well as the ban on foreign entrepreneurs from participating in certain strategic sectors.
The state tends to be very present in various sectors of the Indian economy, so much so that even today many companies can be traced back to the government, starting with financial services and up to banks, which lend money mainly to public enterprises.
Another risk linked to the country is high inflation, which reached 16% in 2010: to combat it, the government raised rates 13 times since March of that year. Inflation in 2019 is around 9%, particularly due to the rise in prices in the food sector.
The last risk is that of the “endemic” corruption that India suffers from.
The rating agencies judge the country as a speculative investment, giving it a rating of BBB-.