In the midst of uncertainty regarding Covid-19 and the economy, many international groups find themselves asking tough questions about the future. Is this a time for conservation or expansion? How will consumer behaviours change? Is China an attractive manufacturing destination now? How does India rank in comparison to China for manufacturing?
AMA has worked for over 30 years with many global companies setting up a presence in India. Over the years, an India branch has gone from a "good to have" to a "must have" for many of them – a necessity without which a global business may not be able to maintain its size, momentum and innovation. At the same time, global businesses are wary of the Indian legal and tax systems, bureaucracy and "chaos".
In a post-Covid world, this takes on greater significance, especially in view of potential sanctions by governments on China. What are the factors that make India an attractive destination to set up manufacturing, service back offices, branches or joint ventures?
Changes to tax rates
Through changes announced in 2019, new manufacturing companies are now eligible for historical low tax rates of 15% plus surcharge and cess. Non-manufacturing companies are eligible for a tax rate of 22% plus surcharge and cess. With corporate tax rates in most countries ranging between 25% to 40%, this is a distinct advantage.
Micro, Small and Medium Enterprises (MSMEs) recognition
Under India's previous MSME Regulations, the definition of a micro, small or medium enterprise covered very limited small entities. The Government has now revised this to include companies that have investment up to INR 500 million (~USD 6.5 million) and revenue up to INR 2500 million (~USD 33 million). This brings many more companies into the MSME ambit.
Benefits available to MSMEs include working capital loans from the Government or Government agencies, protection against delays in payments from customers, a preference in supplying to the Indian Government, and special collateral-free loans announced as part of an economic stimulus package announced in relation to Covid.
Cost of labour
India has historically had the lowest cost of labour internationally, a significant contributor to its low cost of production. In light of the economic impact of Covid, several states have now also simplified labour laws and made them more employer-friendly. More states are expected to follow suit. Labour laws in India also see significant duplication and overlap between statutes, making their interpretation and application difficult. The current move seems to be a step towards simplification on a much broader level for the nation as a whole.
Cost of space
The real estate market is seeing reductions and these are expected to continue over the next year or so. The cost of buying and leasing office space / factory space has reduced and there is a greater availability of property.
Combined with good IT infrastructure in all major cities, companies will find it easy to implement a combination of limited office space and work-from-home for their employees in a post-Covid world.
Valuations bottoming out
The post-Covid lull in deal-making will prove to be an opportunity for many. A recessionary environment and working capital challenges due to Covid have made sellers of small to mid-sized companies more open to lower valuations. Several fundamentally sound businesses with a cash-flow problem at this stage may begin to invite external investments. Other businesses with more pressing problems may be open to selling assets such as factory buildings, plant & machinery, etc. at reasonable prices. This makes it a good time for a buyer looking to expand into India, to do so via a joint-venture route in an existing company or via asset purchase. Fresh infusions would be needed for the first 1-3 years to ensure that the Indian company is ready to capitalise on the upswing when it takes place.
This was the first of two parts on the potential benefits of investing in India in post-Covid world. Please watch out for the next part coming soon.
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