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Why are overseas companies keen to invest and grow in India?

India is currently one of the largest economies in the world, with the third-highest gross domestic product measured at purchasing power parity. By 2030, the country is expected to overtake the US to become the second-largest economy in the world, behind China.

The population is huge; more than 1.3 billion people make India the world’s second-most-populous country. Importantly, also, the population is young – more than 50% are under the age of 25, and 65% are under 35. In addition to exports, there is also huge potential for local consumption due to a large and growing middle class. India has also improved its ranking in the World Bank’s Ease of Doing Business Index, from 110th in 2017 to 77th in 2018. There is a strong focus on education – meaning the workforce is highly skilled. English is widely spoken and is also the official language of the Government of India, along with Hindi.

How is the economy of India changing?

Much of India’s recent economic growth has been based on the knowledge-driven service sector, thanks in large part to the country’s skills in information technology and high standard of English proficiency.  But in 2014, the Government launched the “Make in India” stimulus programme, aimed at using India’s talent and resources to increase the manufacturing of goods both for domestic consumption and export.

The “Make in India” programme is intended to boost foreign direct investment in about 25 sectors, including pharmaceuticals, construction, automobiles, textiles and biotechnology. The programme is bearing fruit:  Japan, for example, announced a US$12 billion Japan-India Make-in-India Speciality Finance Facility to pump investment into India. And in the automobile sector, for example, many global corporations, notably some German-based companies, have set up manufacturing hubs in India.

The country has a large, skilled workforce and manufacturing costs that are lower than some of its competitor economies. This all means that the manufacturing sector seems likely to continue to grow in importance in India.

Another government initiative aimed at boosting the freedom of movement of goods and services has been the nationwide implementation of a uniform indirect tax for goods and services called the Goods and Service Tax (GST). While previously states had different tax rates, the Government has unified the tax code across the country to facilitate the greater freedom of goods and services.

What are some of the risks facing companies operating in India?

Natural catastrophe is one of the biggest risks facing companies in India, which is prone to flooding, notably in monsoon season, and drought. For example, flooding and landslides in the southern state of Kerala last year resulted in tragic loss of life and about US$3 billion of economic damage – only about 10% of which was insured. In 2005, the Government set up the National Disaster Management Authority to coordinate the response to natural or man-made disasters. The NDMA also plays a preventative role and is helping to tackle issues that have exacerbated natural catastrophes, such as the indiscriminate felling of trees, for example.

Geopolitical tensions have also been a challenge for India in recent times, notably with its neighbours China and Pakistan. It has to be noted, however, that only a small part of India shares a border with Pakistan, meaning that the geographic area affected by any political violence is likely limited. Internal political tensions have also been a factor in recent years. Companies operating in or expanding into India must consider these exposures in their risk management strategies and talk to international insurers with expertise in this area.

How can multinational companies add India risks to their global programmes?

Non-admitted insurers cannot write business directly in India. However, there are a number of non-life insurers operating in the country, ranging from State-owned insurers to privately-owned insurers, some of which are joint ventures with international insurers. Overseas insurers can hold stakes of up to 49% in these joint ventures.

For multinational clients with insurable risks in India, AXA XL has the capability to provide local cover through our AXA XL’s Joint Venture, Bharti AXA or a network partner. From large corporations to middle-market companies we can include casualty, property, specialty and professional lines cover as part of a global programme.

When placing a local policy in India, customers should be aware of local “cash before cover” regulation, which requires payment prior to effecting cover.  In addition, clients with captives or a reinsurance panel cannot expect a 100% cession out of India because of the strict reinsurance limitations in place.  Local regulation stipulates that overseas reinsurance cessions are generally only allowed once the local cedents have received a specific number of declinations by local insurance companies, including GIC, the local state-owned reinsurance company.  Many international insurers, including AXA XL, have therefore implemented treaty solutions to maximise exportability to the extent possible while providing a seamless experience for multinational clients.  

This article was first published in International Programme News.

  • About The Author
  • Emerging Markets Development Director at AXA XL,a division of AXA
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