At the end of August, data emerged that India’s economy was growing at its fastest rate in nearly three years.

India has long been held up as one of the world’s most attractive emerging markets. The country’s booming population, burgeoning middle class and relative political stability – at least compared to some of its Asian counterparts – have provided the backdrop to a flood of multinational investment in recent years.

Let’s be clear, like the rest of the world, India was not immune from the impact of the global recession. As the world’s economy reeled in a banking crisis that led to a slump in consumer demand, India’s GDP slowed. However, at its slowest, in the final quarter of 2008, India’s economy still grew by 5.3%.

And, eighteen months later, manufacturing growth and improved farm output drove an 8.6% rise in India’s GDP during the three months between April and June 2010. Those numbers highlighted just why the Indian economy appeals to businesses, not least in the food sector, that are facing a fragile global recovery and stagnant economies in the West.

Nonetheless, despite all the promise of selling India’s burgeoning middle class packaged food brands from Cadbury to Kellogg, trading in the economy remains fraught with challenges.

Given the federal nature of India’s democracy, there are issues around navigating state and federal regulation. Distribution and logistics remain problematic, not least for chilled food brands. And, all the while, the restrictions on foreign investment in India’s retail sector remain in place.

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However, those challenges are well known. In recent days, the spotlight has been shone on a couple more issues that could given keen investors reason to pause for thought.

Last week, Bombay’s High Court ruled that communications giant Vodaphone had to pay capital gains tax in India on its 2007 acquisition of local firm Hutchison Essar.

The ruling is set to land Vodaphone with a reported tax bill of GBP1.6bn (US$2.5bn), although The Daily Telegraph said last week the mobile phone operator was considering an appeal. In any event, the case has been monitored closely by multinationals over fears of the impact it could have on M&A in India.

Meanwhile, India’s buoyant economy is enduring some stubborn inflation. India’s wholesale price index rose by 8.5% year-on-year in August and today (16 September) the country’s central bank raised interest rates to “contain inflation and anchor inflationary expectation”.

Food is a key driver in India’s inflation rate. Today, government data showed that India’s annual food inflation rose to 15.1% for the week ending 4 September from 11.5% a week before. The sharp rise was primarily due to a change in the way India measures inflation but milk, wheat, fruit and cereal prices continued to grow.

Higher food prices promises to squeeze the spending power of Indian consumers, particularly the poor, but could also affect the behaviour of the country’s middle class shoppers. On the bright side, the buoyancy of India’s economy means that the central bank’s latest rise in interest rates is unlikely to stymie the country’s growth.

The world’s largest food makers continue to indicate their confidence in India’s potential. Yesterday, Kraft Foods outlined how it plans to grow worldwide in the wake of its acquisition of UK confectioner Cadbury and listed India in its top ten “priority” developing markets.

Getting a footprint in India was a key reason for Kraft’s acquisition of Cadbury, which has had a presence in the country since independence from the British Empire and generated US$400m of sales there in 2009.

“In India, we acquired a tremendous business from Cadbury. When I visited Mumbai recently, I was extremely impressed by Cadbury’s capabilities in sales and distribution,” Khosla said. “Within 24 hours of our visit, we decided to invest in advertising behind some of the Cadbury brands and behind the sales infrastructure. Year-to-date, our results have been outstanding, with revenues up 25%.”

Nestle, meanwhile, which enjoys sales of over CHF1bn (US$986.4m) in India, is reportedly set to build its latest manufacturing site in the country. The Swiss food giant, which is expanding noodle production in the state of Karnataka, is said to be considering setting up a plant to produce dairy and confectionery products in the state of Orissa.

Nestle’s confirmed and planned investments follow similar moves in recent months from multinationals like Del Monte Foods, spice maker McCormick & Co., Nordic conglomerate Orkla Foods and South Korean group Lotte.

For some emerging market watchers, the high food inflation in India is a short-term issue that is unlikely to deter multinationals keen from investing in the country.

Nigel Rendell, senior emerging markets analyst at RBC Capital Markets in London, insists the growth of the country’s middle class will continue to attract investment. “The growth in the middle class is very much a long-term story and [inflation] is not going to alter their spending habits,” Rendell told just-food.

Rendell, however, noted the Vodaphone ruling and said such legal procedures could make investors more “cautious” about expansion. “The last thing that companies like is to make some sort of acquisition and find a whole blown in their budget,” he said.

Nonetheless, India is certain to remain high up on the list of key emerging markets for investors. In A.T. Kearney’s latest index of most appealing markets for retail investors, published in June, India ranked third, down from the top spot handed to the country by the management consultants in 2009 but they insisted growth is set to continue.

China headed the 2010 A.T. Kearney retail list but, looking at the markets more broadly, Rendell said it is a “difficult to say one way or the other” which is the more attractive market for investors.

In political terms, India is more “open” than China, Rendell explained, while India’s domestic companies have earned their growing reputation as multinationals in their own right. Against that is the ongoing peril of regulation and red tape in India, he conceded.

But perhaps the clearest indication of India’s – and China’s – attraction lies in Rendell’s closing comment on the countries’ prospects for growth. “They are both going to be somewhere around 8-9% growth in the long term,” he said.

Opportunities, even in an economy that has long been in the emerging-market spotlight, abound.