India’s Budget 2018-19: What’s in store for foreign investors?

With the hashtag #IndiaMeansbusiness and a strong message against protectionism at the World Economic Forum in Davos last week, Prime Minister Modi once again gave a familiar pitch for his business- friendly approach to governance on a world stage. India-watchers in the business community are familiar with this vision of India—  an economy projected to be at $5 trillion, a rising India where it is easy to do business, unified by a common tax regime, ready to take a leadership role on the world stage. In 2014, when Modi assumed office, these mandates were audacious to say the least. In the course of 3 years, the ruling BJP party has been greeted with tremendous electoral success- it won 8 out of the 9 recent state elections. A large reason for this success is Prime Minister Modi’s own personal popularity. However, tomorrow when Finance Minister Jaitley presents the 2018-19 budget, it will be a  litmus test of sorts — both from the international investment community who will gauge exactly how well India measures up to the standards of a global rules-based order and free and fair trade and a fair section of Indians waiting for the much-needed jobs to be created. [Read: India confronts demographic bulge of young people].

The stakes are high for this budget—this is the last opportunity for Prime Minister Modi’s government to present a full-year budget ahead of the 2019 general elections, and set some significant standards for India’s monetary and fiscal policies, revive industrial growth and draw long-term investment. The government also needs a second wind when it comes to economic reforms. The Government of India’s major reforms in 2017, specifically demonetization, which took everyone by surprise, and the implementation of GST, which everyone was anticipating, caused temporary reversals to the economy. Then there are more incremental changes that have moved the needle forward -- such as the recently announced changes to the FDI guidelines in single-brand retail, the decision to allow private investment in India’s national carrier Air India, and to allow FDIs in construction, among others. Moody’s has upgraded India’s sovereign credit rating  to ‘Baa2’ with a stable outlook citing improved growth prospects driven by economic and institutional reforms. And India is witnessing the benefits of the shift as the Prime Minister states from “red tapes to red carpet for investors”.  As a result, India recorded the highest inflow of foreign direct investment in 2016 at 60.1 billion, especially at a time when globally FDIs are on a decline. The government has fast-tracked 200 infrastructure projects worth $140 billion, backed by technology-driven, and e-governance initiatives. Indeed as the 2018 economic survey carried out by the Ministry of Finance pointed out, India’s projected economic growth is 7% -7.5% for 2018-19, inflation is down, a bankruptcy code is helping resolve stressed assets issues, and the GST has resulted in widening the indirect tax base.

In short, there are many things right in India, but investors will ask – what more can and should be done?

From the American business community’s perspective, the election year cannot derail the progress of the U.S.-India commercial ties. As a first step, the Indian Government should prioritize reforms that do not entail a cumbersome legislative process. These could include eliminating anti-market practices such as imposing price controls on medical devices, working in consultation with industry on a solution that would bring greater transparency to the healthcare delivery system, curbing excessive downstream markups, and allowing innovative new products to reach Indian patients.

American industry welcomes Prime Minister Modi’s commitment to create a level playing field between public and private sector companies so as to connect India to global supply chains. For instance, in the defense sector, the U.S.-India Business Council (USIBC) has championed that the government of India establish mechanisms to allow for American private companies to share U.S. classified information with Indian private companies – as they currently can do with the Defense Public Sector Undertakings. USIBC also recommends predictable and timely procurement implementation by Ministry of Defense to encourage American defense companies to set up shop in India and partner with Indian companies in a manner that connects India to the global aerospace and defense supply chain. In the booming e-commerce sector, the government should provide a  level- playing field to e-commerce players, allowing at least 51 percent FDI so that U.S. and Indian companies can partner and provide world-class solutions to merchants and customers.

The distressed rural sector is likely to be a priority area for the Modi government in the medium term according to the 2018 economic survey. To this end, USIBC supports a robust U.S.-India agriculture dialogue that resolves barriers to agriculture, but also creates exchanges among representatives from high agriculture production areas, establishes scientific dialogues, and the sharing of best practices in food safety and nutrition. The government of India could also further liberalize the food processing industry to attract investment from American companies.

India has made tremendous strides in creating greater tax certainty, predictability, and transparency as the government integrates GST into the Indian economy. A significant positive step toward improving the investment climate would be to further reduce tax uncertainty for multinational companies and institutional investors in India, especially in areas such as resolving transfer pricing disputes, updating the U.S.-India bilateral tax treaty, overhauling tax litigation and administrative processes, among others.

India’s financial markets can compete with the world’s best, but they must continue to mature and deepen to support the economic growth PM Modi has promised and that Indian and foreign investors are now expecting.  Bond market development remains a prime area for reform if companies and investors are to have deeper resources for capital and the investment diversification they need to grow.  


Recent polls and election results show Prime Minister Modi is very popular and enjoys high approval ratings. There is broad satisfaction among Indians with the way the Indian economy is faring—and this trend is seen across India as well (Source: Pew Research Center) .

This is the opportunity for Prime Minister Modi and the finance minister to come up with a budget that improves “ease of doing business” and “ease of living”. U.S. industry will remain a solid partner in this effort. (Read: Focus is on improving ease of living for common man: Modi).

Check out USIBC's infographic on American industry's recommendations for the 2018-19 Union Budget.