India should be hitting its Goldilocks moment as an investment destination. Its demographics are right and even countries like China look as though they may move out of the high-speed lane. But just as India could be reaching its investment potential, it’s had its whoopsie moment.

Investors like Amazon, which were kept out of the Chinese revolution, have been working hard to ensure they don’t miss out on India’s 1.3-billion opportunity. And Walmart has bought Flipkart for $16 billion to take a crack at the Indian market. Both giants though were suddenly caught on the back-foot by the government’s Press Note 2 issued December 26 which cracked down on the e-tailers’ retailing practices.

The rules went into force February 1 and The New York Times reported Amazon had to remove 400,000 products from its site the same day. Another estimate is Flipkart has had to drop a quarter of its products. “These changes to e-commerce rules were perceived by industry as capricious and sudden,” says Sasha Riser-Kositsky, a senior Eurasia Group analyst who advises firms globally about investing in India.

“The Indian government’s view is these changes were simply to clarify and enforce rules… but it was clear very little time was given to companies to comply,” he said. There’s the worry, in fact, for Amazon and Walmart. The reason they’re facing sudden headwinds is because of Reliance Industries’ plans for a splashy e-commerce entry. Riser-Kositsky added some investors fear “rule changes like this are designed to benefit certain well-connected Indian competitors to unfairly tilt the playing field — and those perceptions do not help India’s reputation as an investment destination.”

If anyone had any doubts about India’s standing in the global market, they only had to watch Amazon’s and Walmart’s share prices. On February 1, Amazon, which reported other growth setbacks that day, saw its market capitalisation plunge by $45 billion on the Nasdaq, while Walmart lost $5 billion.

Meanwhile, though, Amazon and Flipkart aren’t the only ones feeling the squeeze as the government tightens regulations. Almost simultaneously, the government accelerated its phased manufacturing programme (PMP) for mobile phones. The government’s now insisting firms push ahead with their PMPs immediately. Companies like Samsung had assumed they had till early 2020 to carry out their PMPs

On a different front, meanwhile, steel giant ArcelorMittal has been battling through Indian courts for over a year. Its bid for Essar Steel, which went before the National Company Law Tribunal (NCLT) courts, has been once to the Supreme Court and is expected to head back there again. Kinks are still being ironed out of India’s two-year-old bankruptcy laws, so ArcelorMittal, which had small stakes in two other struggling steel firms, unexpectedly found it had to pay $1 billion to settle dues owed by the companies.

And now, just when ArcelorMittal thought it had Essar Steel in the bag, the Essar Group has offered to clear all its dues and take back its company. The Mittals have been scouting for Indian investments for a decade. But as the case has gone back-and-fro, Aditya Mittal, ArecelorMittal’s president and CFO, remarked to a publication: “If you cannot have a rule-based economy, it is very hard for investors, both within the country and outside the country, to invest.” ArcelorMittal’s interest in India is understandable. India's, which had 101 million tonnes of crude-steel output in 2017, is now the world’s third-largest steel producer and, moreover, its steel production is expected to rise steeply.

Tax demands

The Insolvency Act’s complexities will almost certainly get sorted out in coming years but foreign investors have a greater fear of the Byzantine Indian tax system.

At one level, giants like Vodafone and Cairn have fallen foul of the Indian taxman and found themselves facing humongous tax demands. And, foreign firms, even if they don’t fall foul of the system, still find the Indian tax system extraordinarily complicated. Says Riser-Kositsky: “The India-focussed executive of a big consumer goods company once told me he could live without many of his other executives but couldn't manage without his accountants.” But it’s not all bad from an investment standpoint, says Riser-Kositsky. In other areas, India’s looking like a very different investment destination from a decade ago. The BJP government has carried forward the loosening of regulations, begun around 2012 under Congress. Foreign direct investment (FDI) rules are no longer as onerous as earlier.

Says Riser-Kositsky: “The government has relaxed many FDI restrictions for a variety of sectors. When you speak with companies nowadays, barring a few exceptions, FDI rules are no longer very high on their priorities’ list.” But Riser-Kositsky reckons other issues still are worrying investors and names the usual suspects like labour regulation, quality of infrastructure and energy.

Clearly, one area where constraints still exist is retailing and not only for Amazon and Flipkart. Riser-Kositsky reckons India’s retail sector was ripe for the picking but investments have been held back by restrictions on multi-brand retailing. “Retail is one of the few areas where FDI restrictions still play a substantial role,” says Riser-Kositsky.

Inevitably, the view from the government's side of the Amazon-Walmart imbroglio, is totally different. The government insists it was always understood what’s called “inventory holding” businesses were not allowed in e-commerce. “The press note’s essentially a reiteration of the policy. The implicit statement is, ‘You guys aren’t playing by the rules’," says Devangshu Dutta, retail consultancy Third Eyesight CEO. Dutta says actually India’s FDI rules are much easier than places like the Middle East where foreign companies must take on local partners even if they add nothing to the business.

Adds Vinod Sharma, Managing Director, Deki Electronics: “We’re the largest under-served market. We should be wiser and say, ‘How can we leverage this’?”

Still, no-one should make the mistake of thinking India is the only investment destination left globally. Look at Japanese investment, for instance. Indian diplomats and others who’ve dealt with the Japanese testify to the fact executives there are more comfortable and feel greater cultural affinity with South-East Asia and the CMLV (Cambodia, Myanmar, Laos and Vietnam) countries than India. Also, there are estimated to be 30,000 Japanese companies operating in China compared to just 1,400 in India. With the glass still half-full or half-empty for foreign investors, depending on the way they look at India, there’s a vital need for the government to tread sensitively and judiciously in implementing rules. This country not only faces competition from other Asian economies, and increasingly east Africa too. And in developed markets, India risks being squeezed in a race with automation. That’s shaping up to be a whole other boondoggle for all labour-intensive economies.