India’s policy issues make India a hard market

In a surprising move, India, under Prime Minister Narendra Modi’s ambitious “Make in India” initiative, announced import restrictions on personal computers and laptops in early August. This decision caught major tech giants like Apple, Samsung, and Dell off guard and raised questions about India’s commitment to fostering global investment as it prepares to host leaders from the Group of 20 economies.

While India’s growing strategic significance in the ever-evolving geopolitical landscape has attracted global attention, these import restrictions add another layer of complexity for investors seeking alternatives to China’s slowing economy.

Pravin Krishna, a professor of international economics at Johns Hopkins University, aptly describes this situation as a paradox. On one hand, the Indian government has shown a keen interest in attracting international investment and boosting domestic manufacturing, offering incentives to entice players to set up operations in India. On the other hand, there’s been a noticeable uptick in protectionist measures, often appearing arbitrary and applied to industries that aren’t necessarily dominant.

The new regulations, unveiled on August 3rd, limit the imports of laptops, tablets, “all-in-one” personal computers, and “ultra-small form” factor computers and servers. Initially slated for immediate implementation, they were later postponed until November. Some exemptions exist, such as single purchases from online vendors.

India’s Information Technology Minister, Rajeev Chandrasekhar, defended the regulations as a means to ensure the nation’s technology ecosystem relies on “trusted and verified” systems, whether imported or domestically manufactured, while reducing dependence on imports.

Fitch’s BMI Industry Research analysts believe that while these measures will bolster established domestic tech players like Apple, they will weigh on foreign information and communications technology (ICT) vendors. The restrictions will increase end-product costs for foreign vendors and shift consumer spending toward Indian firms or foreign vendors with a manufacturing presence in India.

Krishna suggests that India could have encouraged local laptop production under production-linked incentives without imposing additional import restrictions.

The Modi government’s push for domestic manufacturing, exemplified by Apple’s decision to shift some production to India, reflects a broader trend in global supply chain reevaluation. Geopolitical tensions, the rise of e-commerce, the pandemic, and regional conflicts have all prompted businesses to reconsider their sourcing strategies. India, with its significant domestic market and youthful demographic profile, is increasingly well-positioned to capitalise on these shifts.

Despite challenges such as a declining labor force and the need to address capital controls, India is poised to become the world’s second-largest economy by 2075, according to Goldman Sachs. The International Monetary Fund predicts India will be the fastest-growing major economy this year. This rosy outlook has prompted substantial foreign investment in Indian equity markets, with global investors pouring approximately $17 billion into Indian equities so far this year.

However, India’s bond markets have not fared as well, as concerns about domestic bond settlement systems, investor registration requirements, and capital gains tax regime alignment with international standards have led to India’s exclusion from a major bond index.

The path forward for India’s capital markets, therefore, hinges on a delicate balance between capital controls and financial stability. As India continues to assert itself on the global stage, how it navigates these complexities will determine its success in attracting both equity and bond investments from the international community.