Conference Title:  Special Analysis: What Economic Reforms can Companies Expect in 2017 by BMR Advisors

Date:  Tuesday, 14th March 2017

Mukesh Butani (Non-executive Chairman with specialization in corporate international tax, transfer pricing, FDI policy, cross-border tax structuring, tax controversy across a range of sectors)
Gokul Chaudhri (Leader, Direct Tax and specializes in Energy, Infrastructure, Chemicals and Mining industry)
Pramit Pal Chaudhuri (Foreign Affairs Editor, Hindustan Times)  

Operator:  Please stand by, we are about to begin.  Good day and welcome to the USIBC Conference, What Economic Reforms can Companies Expect in 2017 and the Future of US-India Trade Relations with BMR Advisors.  Today’s conference is being recorded.  At this time, I would like to turn the conference over to your host, Sukanya Sen, Senior Manager of USIBC.  Please go ahead.

Sukanya Sen: Hello, everybody.  My name is Sukanya Sen and I have with me Mr Mukesh Butani, Non-Executive Chairman of BMR, who specializes in corporate international tax, transfer pricing and FDI policy.  We will be discussing today, the next phase of FDI reforms that the industry can expect in 2017 and if a robust set of reforms is possible in a year with key state elections.  And we will also look at the future of US-India trade relations under the Trump Administration.  Just some housekeeping rules, all participants will be on a listen mode.  After our speakers finish their presentation, participants can ask questions.  So with that, over to you Mr Butani.

Mukesh Butani: Thanks, Sukanya.  Hi, everyone.  For this call, I’m pleased to introduce you to my colleague, Gokul Chaudhri, who is the leader of direct tax and regulatory practice.  He specializes in industries such as energy, infrastructure, chemicals and the mining industry and he’s worked with several Fortune 500 companies in these areas of practice.  We are also delighted to welcome our guest speaker, Pramit Pal Chaudhuri.  Pramit is the foreign editor for Hindustan Times and advisor, BowerGroupAsia.  He’s a distinguished fellow and head of strategic affairs at the Ananta Aspen Centre in New Delhi.

Today’s presentation was timed very well and when we were planning this session with the USIBC, we felt that it would be more appropriate to time this when we have the outcome of the state elections which is just about less than 48 hours old in India.  And we wanted to set the tone for this webinar by talking not just about the emerging policy and economic landscape in India but how it would be in the context of the outcome of state elections.  So what we’ve essentially done, we wanted to discuss the emerging political landscape that will evolve[?] as a result of the state elections.  We wanted to then look at the economic ramifications of these changes that we have seen.  We also wanted to look at the potential key reforms agenda in general and in particular, the reforms agenda as we see in crystal ball gaze for 2017 and beyond.  In this context, we also wanted to discuss what it would mean specifically for US investors in India.

Firstly, on the emerging landscape.  Well, clearly, the outcome of the state elections merely suggest to us that Mr Modi and his government are laying a strong foundation for the outcome of the 2019 national elections.  What has happened after the state elections is that almost 54% of India’s population now falls under Mr Modi’s political party, BJP, which covers 64% of India’s territory which is now under the BJP rule.

Now, what does this all mean?  Some of the important projects and schemes that were launched by the government whether it’s got to do with Made in India, Skill India, Digital India, are likely to get further impetus because there has often been criticism as regards to implementation of the scheme.  It would also mean that reforms that are currently underway, whether it’s got to do with the GST, and we’ll talk a little bit more about that, the implications of the insolvency and the bankruptcy code, media has already started speculating an aggressive dose of labor reforms and possibly, Mr Modi’s cooperative federalism by which he wants to push reforms at the state government level particularly in the area of land and police reforms.  And more importantly, his government’s commitment in so far as the crusade on black money is concerned will continue.

Now, what does this all mean?  With five states now, more five additional states being ruled by the current coalition of BJP, would it mean consolidation of power in the upper house which could also see passage of several non-money votes[?] which, as you know in the past, were get – were got – did get held back because of the current government not having the requisite majority.  And finally, the land reforms, the education reforms and health reforms to assume more accountability and the state level.

With that, I hand it over to Pramit to take us through how does he, in his capacity as a foreign editor, see the emergence of the political landscape in India.  Pramit, over to you.

Pramit Pal Chaudhuri: Thank you, Mukesh.  I’ll begin by saying that the election results of Uttar Pradesh, which is a state, as many of you may know, the population of 210 million people and represents 15% of the parliamentary seats in India, but it’s called the king maker seats because in many ways, without the states, you cannot expect to rule or have a dominant position in Indian politics.  Now, Modi has swept the state.  He has swept it far beyond the predictions of any pollster, as many of you will know, but also beyond the predictions of his own party.  The head of the Uttar Pradesh BJP state unit was in my newspaper office just two days before the election results came out.  And when we asked him, Mr Modi said, ‘Oh, I’m expecting about 240 to 250 seats.’  And as we know, he won 325 in the end, far beyond the BJP’s own predictions.

Now, the first consequence of this is that within the political establishments in India and for the [inaudible] or for whatever that matters[?], there’s now a very clear sense that in – Mr Modi is now almost guaranteed to be the next – to have a second term when he goes for elections in 2019.  Burying some cataclysmic error on his own part or something – some other problem, there’s nothing really that stands in his way.  Not only has the region of the – there is seriously no opposition left in terms of the congress party which was decimated in Uttar Pradesh and has in fact lost most of the state elections since he’s come to power.

The regional parties which could have theoretically acted as a balance – as a third force in Indian politics, the two – are two of the biggest, BSP and the Samajwadi Party, were both wiped out in Uttar Pradesh.  Modi’s ability to win over votes on the basis of his personal charisma, his agenda far exceeds the strength of his own party, the popularity of his own party as people who’ve gone on the ground have said we – the voters said we were voting for Modi.  And when asked about the BJP, his party, and he said, ‘Well, that doesn’t matter so much.’  So you have this overwhelming state of affairs situation where Modi is now seen almost certain to have a second term in the – as a prime minister.

What does this, in turn, mean?  First, he has now a sense of purpose that my agenda – my legislative agenda is clearly working.  For example, he was criticized by a lot of people for the really hack[?] handed way that the demonetization was carried out and the – but voters clearly decided that either they didn’t care or they were prepared to vote for a man who they thought was trying to do something.  Modi is, by definition, a risk taker.  He doesn’t – he seriously doesn’t believe that he lives – he’s in office to do very little.  He wants to do things and he sees no reason why.  When I talked to his senior bureaucrats, they all say this is a prime minister who says, and I use a cricketing term here, bat on your front foot or in other words, you know, go for a homerun when you try to strike.  I'll try to use a baseball example.  And so he is now going to continue this.  He has now proven to his own party, and this is very important because many of his own party members thought the decision for example to go ahead with the goods and service tax reform before – they said, ‘Push it to your second term because it’s going to be disruptive, it’s going to be inflationary, you don’t know how it will work out,’ and he says, ‘No, we’re going to keep pushing reforms because that’s what people will vote me – keep voting for.’  And now he’s – and in his view, he is now being completely – he has proven to his own critics within his own party.

And the opposition is cowed, the regional part is now look at him and say, ‘Opposing a Modi agenda is political suicide.’  In every – because even in states where he lost, like Bihar, in the state elections there, the BJP still increased its vote percentage figure quite dramatically.  The only reason why he lost Bihar was because all of the – the rest of the vote was combined in one opposition coalition because of the relatively rare state of affairs.  So the third thing now for him is that having got the UP elections and these other smaller elections that –

Gokul Chaudhri:  Sukanya, this is Gokul.  Have we lost Pramit?

Sukanya Sen:  Yeah, I think so.  He might have dialed back in.  Mukesh, do you want to just jump in and just carry forward?

Mukesh Butani: Yes, I will – I will jump in before Pramit joins.  Sorry, everyone, for this interruption.  I'm sure there would be something with Pramit’s phone.  Gokul, my question to you really on the emerging political landscape, you know, more in terms of the key policy and legislative changes, how do you see this panning out because, you know, you’ve been in and out of the Ministry of Finance and you’ve been following all developments on Foreign Investment Promotion Board, how do you see this panning out?

Gokul Chaudhri: Certainly, Mukesh.  It is very clear that the first impact is that not only the political constituency is backing Mr Modi, but given the fact that he will run a term possibly until 2024 means that the bureaucracy which often is responsible for either the implementation or the lack of it of various policies or the phase of the reforms, the bureaucracy knows very well that they need to deliver all agenda that Mr Modi said.  And therefore, the bureaucracy will be on board because they no longer see this as a lame duck government going out in two years, but a government that possibly has six years to go, which is possibly longer than what most of senior bureaucrats have their term before they retire.  So really, they need to fall in line to deliver on this agenda.  So I think there will be not just the political will which will be there but also some amount of bureaucratic momentum that will build up in here.

We’re also seeing, as you correctly mentioned, that there was often this interplay between what the federal government proposed but raised[?] the implementation [inaudible] the disposal of the states.  So for example, the entire reforms that were proposed in relation to the power sector on the distribution side, you know, you had the programs being designed at the federal level but really, the entire indebtedness of the distribution companies were at the state level.  And the question really was how much the states are really going to be on board.  And as you correctly said, we have nearly two-thirds of the land mass and nearly 17 out of the 29 odd states now in line to the BJP and has Mr Modi’s clout[?] in the government, in his party and across the land mass of India means that the states’ adoption of number of federal programs for reforms in key infrastructure sector where state governments are equally relevant is something which is an important feature that will come in.

So when we look at things which are going to be interesting there is, you know, a lot of reforms which are needed for making his big projects like Make in India or Skill India really functional means labor reforms.  And labor reforms are not just possible by just a federal government stepping in, it needs state level.  And that’s where the planning board, which is an ATIO[?], has already stated the ranking of states and they’re doing it very efficiently and effectively.  And I think the competitiveness among the states, the cooperative federalism that is his perfect phrase to describe it would mean that we will start seeing the emergence of some of the more tougher regulatory reforms, such as the labor reforms coming in.

Mukesh Butani: Thank you, Gokul.  While we wait for Pramit to join us, we just thought we will look at the economic ramification.  What does all of this mean, given the political landscape?  Well, simplistically stating, you know, what – does this mean that the macroeconomic fundamentals will continue to improve despite challenges on the external front?  Will this mean that they would be greater dosage of foreign investment?  Now, bear in mind that we’ve seen foreign investment more robust in the area of foreign institutional funds rather than mega manufacturing projects being set up in India.  And the reason that this topic is close to the government’s heart and particularly to Mr Modi’s heart is employment.  You know, any dosage of foreign investment that comes in to the foreign portfolio investment doesn’t necessarily result in employment.  So if you just look at the figures in the last, say, two quarters, we saw the last quarter of 2016 when there were net outflows of foreign – of foreign exchange largely from the foreign portfolio investment but we also saw the first two months of the first quarter, January and February 2017, giving us a net inflow of foreign portfolio investment.  So you’re dealing with really an area of capital which is mobile in my view.

What does this all translate into, you know, greater, you know, infrastructure projects in a public-private partnership, impetus to us the roads, ports, renewable energy project.  Does it also mean a stronger rupee and lower deficits?  We already saw how the stock market reacted today.  So after many weeks, we saw considerable strengthening of rupee that has happened.  Having said that, there are several internal and external factors that could, in our view, kind of be road blocks and they may be temporary road blocks but nevertheless could be roadblocks.  For example, we still need to see how the Brexit is going to pan out from an Indian standpoint.  What would be the future of EU in light of the developments?  What is the Trump’s administration stand?

Also, purely form a result standpoint, the corporate results of first quarter of 2017 will be something that will be watched very, very closely because most people feel that the third quarter outcome of 2016 really did not show off the real downward trend in the GDP growth rate in so far as the impact of the monetization is concerned.  We’ve also seen changes in this year’s budget and I’ll come to that at a later stage where there is an [inaudible] administration which has been given enhanced power in light of budget of 2017.  Pramit, I can hear you.  You’re on the line.

Pramit Pal Chaudhuri:  Yeah.

Mukesh Butani: We just skipped the fourth module on the political landscape and moved onto the economic ramification, but I would rather hand it over to you to take you through the political landscape.

Pramit Pal Chaudhuri: Sure. Can you tell me when exactly I dropped off because I have – I was [inaudible] at the point that my line got cut.

Mukesh Butani: I think you were – Pramit, you were describing Mr Modi’s span as it sort of had, you know, reached with the – with the – with his electoral success not just to where the – with his own party but also to describing how the regional parties were behaving as a result of the momentum of the water[?].

Pramit Pal Chaudhuri:  Yeah, so – yeah, okay.  Just – so broadly speaking, what I was trying to argue was that the – what we see with Modi and one of the reasons why he has exactly enormous political momentum and why the opposition parties, notably the regional parties more than anything else are now nervous about aligning in any way against him, is that his – he has been able to, one, break into the social base of a lot of the regional parties.  Most of the regional parties are built around some form of identity politics, caste, ethnicity, religion and we saw in [inaudible] and in two less extensive things like a Bombay municipal elections and so on where they’ve been able to take on another regional party or local party and Modi almost solely on the basis of his charisma, partly on his agenda, has been able to break into that social base, and steal such an enormous chunk of that vote away from that via or from the regional local party that they are now actually sacred to take him on because he’s now shown repeatedly that he is – that he is – his popularly has shown – this is supported in, you know, a fair amount of polling evidence.  It cuts across all groups.  Rural, urban, young, poor, rich, it doesn’t – rich and poor, it doesn’t really make any – make much difference as far as his support base is concerned.

And in the case of Bihar where he did lose, what was interesting was that he still increased the vote percentage of his party but the opposition was united, the three opposition parties were untied and were able therefore to get a vote, to secure a vote percentage that was larger than him.  But this is an unusual state of affairs.  It’s so far not being replicated in any other state.  And I think and I hope – I don’t know if I mentioned, so now he will have a 15-month break from any local elections so where he will now being able to go right into the election year 2018 with as much as [inaudible] as he could put out on his legislative agenda.

And as I said what is, you know, I’ll just stress this for where I come to a close and go back to let Mukesh take over, Modi has been – as I think I’ve said, the senior bureaucrats are very clear when they talked to him as political minister.  He doesn’t see any reason why he should stop in terms of carrying out reforms even when they may have negative consequences for the economy.  For example, these temporary ones, something like demonetization or implementation of GST, the Goods and Service Tax because he believes that voters actually prefer a ruler who looks like he’s trying to do something rather than one who just sits and does nothing.  So even during 2018 which will be in a year, there’ll be running and so election period of regional task[?] election has to be held by April 2019, I expect Modi to continue to push reforms without any – not much concern about the electoral consequences or should I say should be too weary about forging ahead on these issues.  Mukesh, I’ll hand it over to you again.

Mukesh Butani: Yeah.  I think, Pramit, we were – you know, I’ll just quickly hand it over to you just to set the context of, you know, the routine and knowing what in your view will this result into various outcome on his key policy and legislative reforms agenda particularly given the fact that the conclusion of election in five states, his strength in the upper house improved and all the constraints that he experienced in the first two years that he was unable to get non-money bill passed to the upper house.  For example, the Land Bill [inaudible] for him to get the constitution amendment on the GST pass through and does that also mean that Mr Modi will push with greater aggression, his cooperative federalism agenda by which he will give more empowerment and hold states accountable for reforms in the area of land, education, healthcare, so on and so forth?

Pramit Pal Chaudhuri:    Right. Yes.  I think – and of – and the first major reform of course that he’s going to be pushing forward and one that would have happened regardless of the election – electoral results but one where I expect now, there’s any sort of legislative guerilla welfare by the opposition will now be much reduced is the passage of the Goods and Service Tax that has to come into play on 1st September.  It’s now legally constitutionally mandated but now the government which in the battle in the sort of the GST council which is a body of state and central government ministers which will decide the final points of the GST.  The opposition that he faces there, I expect now to be much reduced.  There’ll be much reluctance on those states to fight him on some of the – on some of the key points of the GST.  Right now the GST is some way – in many ways imperfect.  It has too many levels – too many levels of tax and the government wants to eventually consolidate them.  But I think now we can expect that he will be able to get the GST council not just to question the passage and the implementation but the actual reform of the GST itself after it’s being passed will now be much easier for him.

The second key areas where I think is going to be very interesting to see, the third – the third rail  in Indian politics has always been labor reform.  And another one that’s not too far behind is privatization.  Both of them which our polling has shown that are exceedingly unpopular with a large chunks of the electorate.  Labor unions on one side and the general public are opposed to privatization.  If you saw the last economic survey, they actually had a poll showing that Indians are among the least supportive of the idea of privatization among populations, major populations in the world.

But now I think he feels he’s going to go ahead and all the indications or signals we’re getting from the government is that two bills are already that are pending or have been – or about to be tabled in parliament were on the hold because of the state elections will now almost certainly go through.  One is that the factory is actually amended so that companies with, I think, 300 employees and less will be able to sack[?] or reduce the staff in emergency cases without the almost horrendously labyrinthed process that doesn’t exist.  The process was actually designed not to let them to reduce staff.  That is really a huge, huge importance from small and medium enterprises which constitutes the bulk in Indian manufacturing.

And second will be privatization which will be a clear – be more important in terms of its signaling because the initial list of companies that the government’s economic think-tank, NITI Ayog, has put off for privatization on relatively non-core industries like hotels and construction firms and so on.  But the idea is for the government to start the beginning the process of privatization, so in a manner that it becomes naturally accepted to political landscape of India that this will occasionally happen.  Governments will divest – not such divest, but give up total management control of state-owned enterprises.  And, though, those party[?] lists will now start to be coming into implementation, it will start to slowly sell them off.  That doesn’t require legislation.  That’s an executive decision but it’s something that we’ll start to see moving forward.

I don’t expect land acquisition to change in any way.  I think at the central government level in private conversations, Modi has indicated that he feels that this is something that the state governments need to be doing but he’s carefully laid out – laid out at the governments – state governments, how the blue prints to do so and he’s encouraging obviously the states that are run by his own party, the BJP, to go at the front – to be the frontrunners in this issues so it will be easing land acquisition in a manner that’s supportive of business and investment.  So Rajasthan and Madhya Pradesh have already began to move that forward.  And as more and more states fall under the BJP’s rule, I would expect more and more of those states to be called in by Modi and say, ‘Now you have got to begin that process of implementing and changing land acquisition step by step because electorally, it doesn’t seem to be hurting anybody.  I have – look at my mandate, there is no reason for you not to do it.’  So I see that as a slow process that will slowly build up and that would be part of the game that he’s – that’s part of his – that’s a part of the process that he has and reflects the strength that he have within his own party.

And on what Mukesh was talking about the new federalism, this is actually a very important aspect of Modi.  Because he ran a state government for three terms and that was served as a central ministry, he is very clear in his mind and he said this to many people that the central government of Delhi, these people in Delhi don’t understand how difficult it is to implement.  You can’t use, you know, one size fits all policies in India for a lot of things and this includes things like education, healthcare, land acquisition and so on and so forth.  These must be given back to the states.  It’s in the constitution that it’s supposed to be given.  The states are supposed to take the – take the primary responsibility for a lot of these areas.  And so a system of block grants have already started and you can see in every budget, he’s giving more and more money to the states and saying, the responsibility now lies with you, I’ll give you the money.

Now, there has been a lot of criticisms.  Some people say the states are not ready for this.  So he argues essentially this is like – this is like more of hazard.  If you don’t give them the responsibility and every time they can go around and blame the central government for the failures in education, healthcare in India which are of course are quite plentiful, they never might learn and the central government will never be able to handle this problem.  But the BJP has the advantage because his argument is that the BJP has been winning on the basis largely, not only, of governance as a primary agenda that we are the party of good governance.

There’s a little bit of Hindu nationalism mixed in a little bit of caste, but increasingly you can see, the caste development has become the prominent portion of his election strategy, election platform, that if this is going to be what we are good at, then more money will go to the states.  The BJP will be the party that can handle that money better than anybody else because we’re the party of good governance.  If we aren’t good, then, you know, you guys should be down there at the state level.  So this federalism is now embedded, deeply embedded and has been always embedded in his mind and he’s going to start implementing this and he sees this as playing on the strengths of his own party.  It’s both sort of ideological position but it also represents a canny political move on his part.  There are other, you know, fair number of other reforms I go into but I think those were the – were some of the big ones that we’ll be looking at in the big picture since.  Mukesh, I’ll give it back to you.

Mukesh Butani: I’m just going to – before I get to to Gokul to take us through some of these sectorial reforms that he sees overseeing the FTI policy, Pramit, I wanted your quick view of, you know, most skeptics also believe that there are host of internal and external challenges that Mr Modi has and I wanted a quick comment on what do – do you see a change in his foreign policy?  We still haven’t seen what is his stance towards the new administration in the United States.  How does he see implications of Brexit, future of EU?  Corporate still have weak sentiment purely from an investment standpoint and we still need to wait and see the outcome of the first quarter results of corporates for 2017 which don’t look as promising as the growth agenda looks like.  So there could be some party spoilers as well over here.

Pramit Pal Chaudhuri:  On the external front, Modi has driven a – I mean all – everybody’s foreign policy has a very strong economic agenda but he is very clear in his public and private statements that a corp issue or course – part of his foreign policy is about using or leveraging India’s growing profile influence interest to foreign investors.  He’ll trans – to begin what he could – what he believes to be the transformation or what he calls now New India, and so he played a lot of his foreign policies built around exactly how does this country fit in to my ability to transform the economy. I remember once when we met him, we asked him why are you – and this is after his first few years in office.  We asked, , why were you travelling so much?  What’s your number one priority during this endless, you know, global circumnavigation?  And he said, it’s about restoring foreign investor confidence.  That’s my first step.  That’s the first reason why I’m going out there.  But as he’s going around, he’s finding that the interest in India from a lot of governments, partly driven by geopolitics but then also with a strong economic component and when he gets to a country that said we have a strong geopolitical interest to you, he says, ‘Please put your money where your mouth is and put some money into the Indian – Indian economy.’

Now, two perfect – two best examples of this are two mid-level powers if you wish.  One is Japan where he has one of his closest relationships.  It was one, to be fair, began with Manmohan Singh.  But it’s now very clear that Japan is investing in India to large extents because its corporation will be pushed by their government that geopolitically, it is imperative for Japan that India rise in terms of its manufacturing, its economic capacity and so on.  And so therefore, you’re seeing this enormous surge in Japanese investment even though sometimes a lot of it in fact is not commercially viable yet.

The other country is United Arab Emirates where we’ve seen Modi reluctant to go to West Asia, a part of the world we saw initially as being slightly dangerous and chaotic.  And at the request of the Abu Dhabi royal family who visits there, and what does he come back with, a commitment from them that $85 billion worth of infrastructure investments from their sovereign wealth fund will be made over to coming years into India. It will take a while to build up because, you know, infrastructure is not the easiest thing to invest in India but there’s again a very strong geopolitical push on this to come in.

So I think at one front we’re going to keep seeing Modi keep getting this kind of commitment on the geopolitical front.  Europe is going to be an interesting problem.  Europe has traditionally been our biggest source of investment but Europe is now so inward-looking that when I talk to people in the Indian government, they’re saying it’s very difficult for them to look beyond a certain point.  The country that Modi is really focusing on Europe is not Britain, which is we’re finding a strength where most like – most countries have so much uncertainty involved about where Britain is exactly going.  It’s Germany.  And we will see Modi will be visiting Germany twice in just the next two or three months to speak with Angela Merkel and that is not just quest for investments, manufacturing, but is also about Skills India that the first – one of the key steps we’re allowing manufacturing on making India programs to work is that the – there’s a huge skills deficit at the vocational and technical side that India has to be filled in.  He’s already got a tie-up to the Japanese on that front.  He’s now looking to the Germans who of course as many – as many of you will know has an excellent vocational training program to do exactly the same thing.

And he’s going – he said he’s going to Israel in July.  Most people look upon this as a sort of Hindu nationalist, you know, light wing[?] Jewish nationalist combination but when I talk to Israeli diplomats, they’re very clear.  50% of the conversation with Prime Minister Modi on Israel is water.  Water stressed India.  He’s looking at Israel and saying, ‘This is the world leader in water conversation, recycling and so on.’  And he wants Israel to be at the forefront of transforming India on that front.  So you’re seeing all these niche areas where he’s using the foreign policy to build it around.

Now, let’s just talk about the biggest geopolitical story which is, of course, the United States and China.  China is a – when I talked to the Indian official – when I talked to Indian officials, they say China is a – is a part of great relationship but it’s a relationship that is under control.  It’s not a good one where – but there is slowly a larger, increasing amount of Chinese investment in India, that it’s now doubled to about $2.3 billion.  It’s still a very small amount but the geopolitical hopes that they had when Xi and Modi – Xi Jinping and Modi met in 2015 are clearly not going to be happening or 2014 but that’s clearly not moving anywhere but it’s a relationship that’s rocky but not in any serious danger.

America has been a source of great uncertainty for India.  The Trump administration is still taking a while to settle down but I think on the key points, I’ll just say that it’s – the Indian government’s initial concern about Trump or the Trump administration were on immigration, climate change and smaller issues like the Iran Nuclear deal and to some degree Trump’s policies on Russia which they actually supported a closer relationship to the US and Russia because they saw that as a negative to China.  I think on the climate change issue, they’d accepted that they’re going to have to go on their own but that’s okay because that’s a lot of it that is now private sector-driven and state government driven at the United States and they had a lot of practice like the EU and Japan on that.

Second will be the immigration.  They are using – India is moving towards looking at the US Congress as the body to at least soften the blow on things like H-1B visas.  And they are slowly working on the congress to back channels and other means.  And then finally, they’re looking at the Iran Nuclear deal that accept – well, from what I've heard of their conversations with the American or with the Trump administration – they’re accepting that the deal will not actually fall apart.  There may be more pressure on Iran, but the deal itself will remain intact.  The team that has now come together in foreign policy, Tillerson, McMaster, and I would also throw in Kelly and, of course, Mattis, is something the Indian system is very, very happy with.  Let’s say, it’s a team that works, a little surprised at lack of anybody underneath the, the deputy secretaries, the state[?] secretaries haven't come in but we broadly see that they’ve been reassured in the now I think almost seven or eight different levels of interactions that have taken place between India and the United States, the new administration that the strategic relationship is more or less sound with some question marks when we look at the[?] US-China relationship but we accept that the tone is not particularly friendly between US and China which India is not completely unhappy with.  But when I talked to – in fact the most recent visit by US – Indian foreign secretary to America and he came back and greatly reassured that the strategic relationship remains.

Immigration will be an issue that the Indian public will be concerned about but it’s seen as something that will impinge necessarily in the strategic relationship.  The only area that I think we’ll also wait to see is what’s going to happen on the trade front.  Trump administration indicated that it’s a lot like multilateral trade agreements.  Luckily, India is not a member of any multilateral trade agreement with America other than the WTO which we presume is still going to be around.  And on the unilateral and the bilateral side, we do have not very successful negotiations with the bilateral investment treaty, but if we feel that neither the Modi or the Trump administration has – look like they are particularly pro trade and pro trade or having the interest in trade negotiations of any variety.  They both seem to be very focused in trying to build up their domestic capacities before they move on to the issue of trade agreements.  So I don’t expect too much – too many problems there, though, the traditional problems of intellectual property rights, clashes and so on will probably continue, but it’s an area where it’s still very grey especially on the American side.

Mukesh Butani: Thank you, Pramit.  Gokul, you know, I wanted your specific comments on some of the micro issues on economic globalization particularly in sectors such as oil and gas.  There’s a lot being talked about the open acreage licensing policy, the national gas pricing that has already a lot of allocation in the field budget on airport, seaports, roads, railways, renewal energy.  He also talked in the fields of budget to finance minister about the creation of a mega oil company, how do you see all of these having an impact on the US investors in general and in particularly to any of the sectors that you want to touch upon?

Gokul Chaudhri: So Mukesh, I want to mention that this entire space of macro resource allocation, this is – this got – this is very badly done and really caused in some ways the downfall of the previous regime because they were not able to deal with how these macro resources have to be allocated in a transparent manner and that meant that the impact was on the mining industry, it was on the telecom sector, it was there in relation to oil and gas and then to all other sectors where our macro resources are or our macro sovereign rights were involved.  And I think to some extent now of given the progress of the government has made on different fronts, it is very much likely that they will now finally try and address some of the troublesome policy and regulatory issues for – starting with firstly the oil and gas sector.  We’ll be expecting there’d be open acreage licensing policy, will get announced later this year and that we will see round the year bidding for oil and gas acreages and more importantly we think some of [inaudible] back again with the working and the production sharing contract and one of the important aspect is going to be about extension to some of the existing production sharing contracts which are due to lapse in the next couple of years.  Natural gas pricing has been an area of contention and I think the government will deal with some of the middling issues which are still there.  So that’s one part of it.

I think after these electoral results are out there, the government is likely to also bring about the auction for some of the commercial coal mining which will happen.  So we will start seeing the opening up of these opportunity and investments coming in here.  On the aviation side, the government is ready to build sort of budgetary support, 15 new airports but more importantly from an investor interest perspective, a number of state capital airports and all of these have got a fair bit of passenger traffic which moves there.  A lot of these will go under O&M contracts, operational and management contracts, which will be given out to private enterprises.  So we will see some of that activity coming in there.  So I think we’re going to be seeing sector reforms taking shape and, of course, we cannot – there will be a variation between how different ministries will be responding but I think Mr Modi is very clear, he’s going to be pushing ahead for large infrastructure projects to be built pretty quickly.

Mukesh Butani: And before I ask, Pramit, Gokul, again, a quick question for you on the tax reforms.  And again some of the FDI reforms.  There is an expectation that, you know, FDI in retailing of certain products for the legalization is expected to happen, we also heard the announcement of foreign investment promotion board.  If you can take us to what that actually means.  Curtailing of the list of activities that are under the automatic router so all of this under FDI policy, but most specifically on the tax reforms, my view is that, you know, with the demonetization which was preceded by the income disclosure scheme you will have more taxpayers coming into the tax net.  You will also have more tax compliant or taxpayers coming in which coupled with GST reforms could see a material increase in our tax to GDP ratio which has been holding around 9.5% to 10.5%, though we have seen tax to GDP ratio, you know, touching almost 11% this year.  But more importantly, Mr Modi’s crusade against black money is expected to be further fortified, which would include implementation of the Benami Transactions Law.  And there is also an expectation that there would be reforms more in the area of land registrations by creation of the National Registry and a refined goal monetization scheme.

So before I hand it over to Pramit for a closing comment, I’ll just probably get your quick views on the FDI and the tax reforms.

Gokul Chaudhri: So, Mukesh, you’ve talked about tax reforms, I think that’s something which is certainly work in progress is happening.  We are already, as a country, adopting a number of BEPS recommendations.  So, you know, they seem to bring in the best and worst of the interactive practices pulling[?] rapidly now into India, aligned to what’s happening elsewhere.  India is expected to sign the multilateral instrument.  That is what we hear.  But coming on to the FDI side, one of the key areas is of course retail and FDI and retail which has been something that this government hasn’t been too responsive on.  But I think the first baby steps was last year when the Finance Minister did talk about the fact that 100% foreign investment will be allowed in food retailing, which is produced – that is locally produced or it is food that may be processed in India.

So that part of the policy has already formed its way to implementation but it really hasn’t taken off because I don’t think retailing only of these specific categories on a standalone basis is something which is commercially viable.  What we hear is that the government has sort of understood that the policy that they ruled out was insufficient.  And there’s a strong possibility that the 100% retailing – foreign investment in retailing could be expanded further beyond food and food processing to also try and bring in a wider range of products which are made in India.  And there has also been some amount of conversation to say that possibly they could have non-food items to the extent of 25% of sales also being permitted into this portfolio to enable fast[?] retailing to happen.

Coming to the Foreign Investment Promotion Board which has been sort of a single window clearance that has been given to foreign investment, I think over the last decade, with the series of reforms, mainly 95% to 97% of all foreign investment now moves to the automatic route through the – reporting to the Central Bank rather than any regulatory approval process.  A couple of sectors which are still under the government route involved, A, retailing which I just spoke about and I think the government is keen on liberalizing that; and, B, in so far as different[?] manufacturing is concerned, and then there are a few other sensitive areas but not too many.  I think what is clearly emerging is that the government wants to take far more sectors into the automatic approval route, that’s one.  And, B, for those which are going to be in some form of an approval, really they will have the sectoral ministries, whether it’s the Ministry of Defense or it will be the Department of Industrial Policy and Promotion that could be playing the role of being the facilitator.  I think it will be also useful to see as to what type of mechanism the government puts into place to ensure that the investor community is not found – do not find lacking the single window clearance which the FIPB provided.

So they will possibly have some sort of an administrative mechanism to try and deal with that.  But I think the intent is very clear.  They want to try and remove as many of the roadblocks or approval processes that deal with foreign investment.

Mukesh Butani: Thanks, Gokul.  Pramit, I’m going to come back to you for the final rounding of comments before we open the floor for Q&A.  You covered very well the Us-India independent bilateral trade ties and the possibility of that.  You covered the strategic defense partnership and the fact that India will continue to watch developments on the US administration in so far as immigration and so-called border tax implementation is concerned.  But can you crystal ball gaze particularly given the fact that our Foreign Secretary had a one-week visit as to how and at what stage will a dialogue emerge between the two leaders and what is the likelihood of India’s stance and the US stance because most of it seems to be unknown and unspoken, so we can merely crystal ball gaze at this point in time.

Pramit Pal Chaudhuri:    So, yes, we have – Modi has asked for a meeting with President Trump in May.  And I think that’s one of the reasons why the Foreign Secretary, Mr [inaudible] Jaishankar went to Washington was to try and finalize both the agenda and the time on that.  And as I said, there’s been really a long range of meetings between both the Foreign Secretary, our National Security Advisor, our Ambassador with almost everybody in the Trump Administration who’s presently there.  We’ve had it with even his son-in-law, Jayakrishnan[?], we’ve had it with Steve Bannon.  And I think the real issue for the Indian government is where exactly the Deputy Secretary of states, the Assistant Secretary from various ministries – when do they start to come into place.

When I talked to Indian officials, they say what we accept is that the line[?] ministries in America continue to reflect the severely strong bipartisan support for the US – a strong India-US relationship, whether it’s driven by concerns about China, concerns about terrorism or just the fact that you have an Indian economy that in many ways fits in very nicely with America on a whole host of areas, especially the technology front.  That remains in place.  And within the US Congress, there is a remarkable [inaudible] consensus.  If you look at Modi’s last visit to United States in the last – the trailing[?] months of the Obama Administration, he spent a lot of time with Paul Ryan, Speaker of the House, he had a lunch with almost all the Senate and House leaders because he recognizes there has got to be continuity definitely on the congressional side even if the White House is a little uncertain.

And the – so the real issue now is President Trump himself who runs an extremely personalized, if you wish, foreign policy and whose largest strategic vision remains somewhat uncertain.  And the Indian side accepts that on certain points such as making in America and manufacturing in the United States and some of the other areas where it’s the white working class base that helped the [inaudible], there isn’t all that much India can do.  And so one of the gains[?] for the Indian side continue to be, can we and where can we find something that would mean that President Trump is investing in the India relationship.  And that continues to be a work in progress.  The discussion between Prime Minister Modi and President Trump has been extremely good, much better in fact than Trump’s conversation with many other world leaders.  Even somebody like Steve Bannon who is [inaudible] ideological and most conservative of people in this administration has made it clear he sees Modi as a frontrunner to the Trump revolution.

So how do we move forward on this is going to be how you use and how does India leverage this to ensure stability in the relationship.  And I think India has been very clear.  We’re not going to – India will not make a large noise song and dance about the H1B Visa issues.  If the visa waives, India can live with that.  It will attempt to delineate[?] or moderate the impact of this via the US Congress.  It will seek to find common areas on the strategic side.  And I think China, to a lesser extent, and Pakistan are virtually the areas where they will seek – and terrorism [inaudible] and seek commonality.  This continues[?] previous policies, previous administrations but I think it will continue to be an area that we will look at.  And I think that, broadly, there’s a sense in the Indian side that we don’t see any major hiccups in the relationship coming up.  We don’t also see any major huge swings in the positive side.  This is not – this is both, in many ways, slightly[?] Indian and the PD[?] administration.

And I don’t think – except that something on the side of the India-US nuclear deal should not be expected with the Trump Administration.  And they’re quite realistic about that.  But I think what has struck me is that over the past 40 days or even two months, Indian government officials in the Foreign Ministry and Prime Minister’s Office have gone from being worried or uncertain as to what exactly the Trump Administration means in terms of the relationship, to being satisfied with the tone of the administration, is positive about India on almost everything.  Part of the game is essentially to sit down and get the nuts and bolts of that relationship or that [inaudible] which is serious nuts and bolts on the policy front.  And part of that will begin, I think, in getting the Trump Administration to actually fill in all of the positions that they have at the very end[?].

Mukesh Butani: Thanks, Pramit.  With that, I hand it over to the operator to open the Q&A session.

Mukesh Butani: Okay, I’ve got two questions, one for Pramit [?] and one for Mukesh[?]. Pramit, the question for you is really, given the sort of trends or rather the global trends on protectionism, how do you see India stand on globalization? Do you see it changing? That’s a question for Permit. And the question I received for Mukesh is, Mukesh, how do you assess India’s [inaudible] preparedness for implementing sophisticated tax rules such as [inaudible]? So either of you could go first.   Permit?

Pramit Pal Chaudhuri: Okay. I’ll just say that, yes, globalization is interesting. We saw President Trump in his inaugural address say that protectionism for the United States, and in Europe, you know, a lot of people are talking about post globalized year. And about at the same time, we saw Xi Jinping in [inaudible] say that trade globalization is a good thing. Less noted was that Prime Minister Modi did a speech at the Raisina Hill dialogue in Delhi and said, the same thing, he said, no, globalization has been good for the world.

And so you see this interesting shift where the country in relation to promoting the idea of globalization [inaudible] suddenly having second thoughts, and a few countries which two of the countries which have benefited but often been quiet about globalization and now taking up the, at least the rhetorical stance that it’s now time to come out and fit in globalization.

The question there is, what role can India play in globalization, because as one of the weakness of India has been that it had always been, it has traditionally been a very difficult country on the issue of multilateral trade, there’s been obstructionists, the practice is relatively stark in particular measures because of the concerns of the poverty and its agricultural sector and so on. So what exactly can India do? It’s interesting to talk to him with this issue, I said, okay, Prime Minister said, globalization is good, what are we going to do about it?

What this does is, one, is on climate change, India is prepared to take a leadership position, Prime Minister Modi is very concerned in the climate change. He sees this a major threat to India, the first time I mentioned after he became prime minister, I asked him about climate change, and he said, this is a very special interest of mine.

And so in climate change, I think we’re going to see India become a lot more active at the diplomatic level, the international [inaudible] negotiating for it, it’s now being relooked at something that India can actually convert into a multi-aging[?] and multi-lateral agency for example. We will see India take up a stance on multi-lateral security, they’re trying to revive the [inaudible] organization they have involved, the Indian Ocean [inaudible] Association, for Indian Ocean. A lot of it is security driven, that’s partly because of the chairs[?] of Asean[?], is struggling to take on, survive the challenge from China and the South China sea.

And India is now moving into the Persian Gulf. Modi is now [inaudible] Persian Gulf countries in quick succession and signed mutual agreements with 13 African countries, and it’s a delivered action, because partly because United States has come to India saying, we really don’t want to do a lot of the security in the Indian Ocean anymore, it’s no longer something we’re interested in. I’d say baby steps by Indian [inaudible] definitely, and they are going to replace the United States, in fact India still hope America will continue to [inaudible] but it’s an indication India recognizes at least, that despite its limited resources and capacities, there is a role that has to start playing at the global side.

Mukesh Butani: Thanks, Pramit.

Gokul, to your question, I will repeat.  What is Indian tax administration preparedness for implementing sophisticated regulations such as base erosion and profit shifting, general anti-avoidance rule and place of effective management?

Gokul Chaudhri: Well, I think, you know, you really seem to have no choice but to implement all of these measures.  What has lighted[?] the call is, again, this government’s philosophy for transparency and avoiding stateless income.

So there has been favorite[?] of what that has been done on the general anti-avoidance law because it was proposed in the 2012 budget and this government specifically came and delayed its implementation by three years.  It’s finally become a reality.

You need to bear in mind that provided they chose 1st April 2017, one, because this was the commitment that was made by the government, two, in the last six months, the government expedited a renegotiation of treaty, a tax treaty, with more issues[?] with Singapore or with Cypress because most of the US investments were coming primarily from these jurisdictions.  There are checks and balances that are there in place to implement the general anti-avoidance law.

And so far, as the base erosion and profit shifting package is concerned, it’s going to be implemented by the G20, supported by the G20 and that the inclusive framework fortify more nations on joining.  So that’s again a reality that India cannot avoid.  It tends to achieve what is close to more is hard, which is transparency, whether that is by way of disclosures or that is by way of automatic and spontaneous exchange of tax information.  The fact that, currently, an Indian tax administration is a chair of the Global Transparency Forum at the OECD in Paris is just a [inaudible] to push the base erosion and profit shifting project.

A place of effective management has come under some degree of criticism.  There has been an element of skepticism that has been expressed.  But I think I consider the place of effective management rules more as a tax avoidance rather than as a revenue mobilization measure.  It’s going to touch very few set of tax payers.  In my view, Indian companies are going in, having subsidiaries overseas with a part of the management located in India and overseas will be impacted purely form an inbound foreign investment standpoint.  I see the place of effective management being of very little significance.

Mukesh Butani: Sukanya, can I hand it to you now?

Sukanya Sen:  Sure, Mukesh.

I think we are almost out of time.  We are at the top of the hour.  So we would just like to thank all our speakers, Pramet, Gokul and Mukesh for, you know, putting together such an interesting conversation.  In case any of the participants have questions, please feel free to email us and I will facilitate and introduction between you and BMR advisors.  And thank you so much, everybody, and have a great evening and a great day.

Mukesh Butani: Thanks, Sukanya.

Sukanya Sen: Thank you so much, everyone.

Gokul Chaudhri:  Thanks.  Bye.

Operator:  That concludes today’s conference.  Thank you for your participation.  You may now disconnect.

Sukanya Sen