The decline of the rule of law in India, and the resulting rise in risks for Western investors, are becoming more and more widely known. This will inevitably stifle what India needs most: investment for jobs, infrastructure, and new opportunities for its 1.3 billion citizens. Yet, the level of investment is far below where it should be: because the Indian government has created an environment that is not safe for investors, in fact it is almost hostile. Investors are thinking twice about risking their money in today’s India.
A former Director-General of the British Chambers of Commerce, John Longworth, put it best when he wrote recently in the Daily Telegraph about “India’s brute force behaviour” towards Western investors highlighting that India is “near the bottom of barrel in the global rankings of ease of doing business,” and adds that “[w]ithout the core principles of rule of law and investment protection, the value of any UK-India trade deal which might emerge will be much diminished.”
Examples abound. The Government of India’s decision to unlawfully terminate its agreement with Devas Multimedia Ltd., and subsequent efforts to expropriate its assets, serves as an instructive case study of the risk facing Western investors. Despite signing an official contract, the Government of India has demonstrated that it cares little for the laws that govern the nation or the treaties it has signed. Instead, the Government of India broke its promise and disregarded the rule of law, just to pursue the agenda of a select few.
A recent report by the London-based Institute for Economic Affairs (IEA), explores the challenges of doing business in India, including the negative direction on property rights and investor protections writing, “the government is systematically breaking Bilateral Investment Treaties (BITs), ignoring court and arbitration rulings, cancelling contracts, expropriating private property and using state institutions such as the tax authorities and the courts to prosecute the very parties whose rights they should be protecting.”
International institutions and experts now express serious concern about India’s direction of travel, and the rising risk of doing business in the country.
The World Bank ranked India 163 out of 190 economies in terms of contract enforcement mechanisms, per the 2020 Ease of Doing Business report. The Heritage Foundation has consistently ranked economic freedoms in India as “repressed.” Per the 2021 Index of Economic Freedom report, Heritage ranked Labor Freedom, Investment Freedom, and Financial Freedom in India as “repressed” assigning a score of 41.3, 40, and 40 (0-100) for each category respectively. Moody’s and Fitch lowered their issuer default rating from ‘stable’ to ‘negative’ for India in June of 2020, citing the government’s inability to adopt policies to mitigate the risks of a long period of low growth.
The Heritage Foundation also ranked India’s Judicial Effectiveness as “repressed” and Government Integrity as “mostly unfree” per the 2021 Index of Economic Freedom report. Freedom House’s latest Freedom in the World Report 2021 is scathing, “The judiciary is formally independent of the political branches of government […] However, lower levels of the judiciary suffer from corruption, and the courts have shown signs of increasing politicization… Also in 2020, the president appointed a recently retired chief justice to the upper house of Parliament, a rare move that critics viewed as a threat to the constitutional separation of powers.”
A by-product of the decline of the rule of law in India, and the rise in risks for Western investors is India’s sovereign rating and economic outlook. Recently, the International Monetary Fund concluded there are “downside risks to the Fund’s April forecast for 12.5% growth” outlook for India and that the “IMF will revisit that forecast when it issued a fresh World Economic Outlook in July.” Fitch Ratings affirmed a BBB sovereign rating for India with “Negative Outlook.”
The negativity of these outlooks is not solely due to the pandemic. Ratings agencies and analysts are not ignoring the growing body of evidence that highlights the investor risk of doing business in India.
Given the seriousness of the economic situation India is currently facing and the need for western investment for jobs, infrastructure, and opportunities for its 1.3 billion citizens, the Government of India would be well advised to take more seriously the importance of respecting the rule of law. That must mean, among other elements, adhering to international treaties and upholding arbitral awards