The India Opportunity

AIMA Conference, Haas School of Business, UC Berkeley
My Talk
08-Sept-2017

It is a great pleasure to be here in Berkeley, at the Haas School, to talk about the India Opportunity.

I will come to this topic from a unique vantage point.

I lived here in the Bay Area for thirty four years, engaging in technology, entrepreneurship and management consulting — through decades of incredible change.

I then moved, in 2014, to Washington to serve in the Obama Administration for three years.  I was the President’s lead official to increase US exports and investment into the US. In that capacity, I oversaw economic engagement, on behalf of the US Department of Commerce, with 78 countries. An area where I was most proud of my engagement and contribution was India.

Three years after the Obama Administration, I headed to India where I lead KPMG India, an organization of 20,000 professionals. My firm has been honored to serve my distinguished fellow panelists as our clients for many years.

So while I saw India from the outside for many years, first from Silicon Valley and then from my perch in the US Government, I now am very much in the inside of the US India engagement.

An inspiring characterization of the US India connection comes to us from America’s great poet, Walt Whitman, one might call him America’s Tagore. Whitman’s great poem, Passage to India, was published at the end of the nineteenth century. It had been a period of technological achievement, the railroad had crossed America on this continent, and the Suez Canal had shortened the distance between the West and India. In Passage to India, Whitman expressed excitement for the technological achievements of the West and suggested that they lead towards seeking the wisdom of India. He spoke of the “earth to be spanned, connected by net-work” and of the “far-darting beams of the spirit,… the unloosed dream,” of both scientists and poets.

While Whitman turned to India for its spiritual riches, today the world is looking at economic opportunity – as suggested by the title of this session: India, the Biggest Opportunity for the Next Decade.

I am a believer in the India opportunity and I have voted with my feet.

I accepted the opportunity to return to India, after four decades in the US, most of them in this bracing environment of the Bay Area, for two reasons. One, I knew the talent of the people of KPMG India. Two, I had seen, in my role as a senior economic official in the Obama Administration, that the action was going to be in India. At that time, I had ranked India, ASEAN and Sub Saharan Africa as the three highest potential areas for growth. Among these, India has the most solid foundation and administrative capacity.

My observations today will combine the perspectives particularly that I developed during my time in DC through conversations with US business leaders and my experiences this year in India.

First, it is very clear that investors were looking for policy stability, predictability and consistency. In particular, they want a stable tax policy environment and administration with reforms focused on lower rates and less bureaucracy, especially unpredictable bureaucracy. I heard Henry Kravis say to the then Finance Minister, we can take bad news, we know how to manage through that, but we can’t take unpredictability. On the tax adjudication front, there has been significant progress in transfer pricing administration and a reduction in the backlog of cases. On predictability, I am afraid we are not home yet.

Second, they want ease of doing business.  Here the Modi Government and many state governments have taken the challenge head-on. There have been significant reforms: the Goods and Services Tax (GST), the Insolvency and Bankruptcy Code (IBC), Real Estate Regulatory reform. While the GST will benefit the economy by creating a unified market and bringing informal sector under the formal economy, the IBC aims to consolidate multiple laws governing bankruptcy proceedings and thereby achieve a speedy resolution. Real Estate Regulatory reform, on the other hand, seeks to bring transparency and accountability in the sector. The Arbitration and Conciliation Act was amended to provide for time bound arbitrations for commercial disputes (currently it takes more than 1400 days to settle such disputes).

Third, there has been a desire for increased liberalization of foreign direct investment.

The FDI regime has been further liberalized, with multiple sectors being opened up for 100 percent FDI. In the defence sector, FDI is allowed up to 49 percent and the new Strategic Partnership policy paves the way for foreign OEMs to collaborate with Indian firms to make defence equipment.

51 percent FDI is allowed in multi brand retail but some potentially daunting conditions remain. And in e-commerce, 100 percent FDI is allowed in e-commerce marketplace model.

The FIPB has been disbanded. Currently, individual departments of the government are given the responsibility to clear FDI proposals in consultation with DIPP (which will issue the standard operating procedures for processing applications).

Fourth, the competition between the states, now termed Competitive Federalism, is an important factor to make investment more welcome.

The states will also benefit from the transparent auction of natural resources: for instance, around $50 billion was expected to come from the auction of 67 coal blocks, conducted in 3 tranches, in 20-30 years; Jharkhand and Chhattisgarh are likely to receive a total of nearly $17 billion each.

There are areas where significant progress is still needed, labor law and land acquisition are top of the list.

Fifth, the Government is making progress, one might argue not fast enough, towards privatization or at least moving public sector enterprises towards market accountability y listing them. Government is working on consolidating and even listing large enterprises, for instance the large insurance companies. The State Bank of India has merged into itself a number of its subsidiaries, with an aim to consolidate and streamline operations. It will be interesting to see the progress on the Air India front.

Sixth, infrastructure has been an area of progress in the areas of airports, ports and power. In the last two years, we have seen large global pension funds especially from Canada and the Middle East investing directly into India. The overhaul of the approach to PPP, with the Government taking more of the upfront risk and the introduction of hybrid annuity models is a helpful development.

Seventh, there is an increasing focus on corporate governance. Business families and founders, called promoters in Indian parlance, are professionalizing their enterprises and often giving up control. This could provide private equity investors with $15-20 B of opportunities a year. In terms of corporate governance, this transition will be an imperfect road as India will have to create its own path that combines the promoters’ long term horizons and long term commitments to fiduciary responsibilities to other shareholders.

I look forward to an engaging discussion with you and my fellow panelists on the India opportunity.