Analysis: Why India doesn’t find a place on F1 calendar

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Rachit Thukral takes a look at the financial side of staging a Grand Prix in India; the Jaypee Group's investment, reasons which led to the race being dropped and possible solutions to get it back on track.

In 2016, it will be for the third year in succession that India will not host a Grand Prix despite having two years left on their contract.

Taxation issues and bureaucratic hurdles have largely been held responsible for the absence of India from the Formula 1 calendar, but the financial troubles of promoters Jaypee Group has been largely absent from the picture.

About a decade ago, Indian conglomerate Jaypee Group had laid an ambitious plan to take their flourishing business to greater heights.

The idea centered around building an F1 circuit in Greater Noida, where the group was able to purchase huge chunks of land at minimal rates.

It was expected that the F1 race - by far the biggest sporting event in the country - would lead to a massive surge in real estate prices in the region, with Jaypee directly deriving benefits by building a slew of townships around the track.

The increased demand for housing, in turn, would increase the demand for power and cement, bringing all-around prosperity for the diversified group.

However, the advent of the global recession in 2008 pushed down the chances of the success of this project. Economic growth dwindled in the country while the interest rates went in the opposite direction.

Finances behind Indian GP

Despite the hostile economic conditions, Jaypee decided to stick to its plans and pumped around Rs 2,000 crore (USD 314 million) in building the Buddh International Circuit on the outskirts of Delhi.

The company further shelled out Rs 197.7 crore (USD 31.1 million) in licensing fee for the inaugural race, as per Jaypee Sports International Limited’s (JPSI) audited accounts.

The figure rose sharply to Rs 249.6 crore (USD 39.1 million) by the third edition, indicating the presence of an escalation clause in the contract.

Additional operating expenses of Rs 121 crore (USD 19 million) were incurred for the inaugural edition of the race, taking the combined figure well past Rs 300 crore (USD 47 million).

It is difficult to determine the extent of taxes paid by JPSI for hosting the race, with the relevant figures not segregated from other activities of the company in the accounts.

However, leading Indian media outlets quoted the custom duties somewhere between Rs 8 - 10 crore (USD 1.25 - 1.57 million). This tax was dropped by the government in 2014, a few months after the last Indian GP.

As far as the revenue was concerned, the promoters could only recover Rs 140 crore (USD 21.2) from the 2011 Indian GP, despite 95,000 fans turning up for the event.

The figure dropped by nearly half to Rs 76 crore (USD 11.5 million) in 2012, before recovering substantially to Rs 113 crore (USD 17.1 million) in 2013.

By this time, Jaypee had managed to reduce operational expenses of the circuit, bringing the total cost of staging the event down to Rs 273 crore (USD 42.91 million).

Even then, the conglomerate was forced to write off losses of Rs 160 crore (USD 25.13 million), without taking taxes into consideration.

Positive steps by Jaypee

Before the F1 cars lined up on the grid for the third time in India, it was clear that the sport would miss the country for at least a year. The hype surrounding F1’s arrival to India was long gone, as made apparent by the dwindling trackside audience.

Jaypee’s financial health was also in a dire state and the conglomerate had to come up with emergency plans to reduce its debts, which totalled to Rs 60,000 crore (USD 9 billion) in its balance sheet on 31st March 2014, the latest year for which its accounts are publically available.

The beleaguered company embarked on a mass-disinvestment drive, that involved selling its core assets in cement and power space. F1 was put aside, with organisers making it clear that the return of the race hinges on tax issues.

What now?

The circuit now is reduced to hosting national races and a promotional/testing venue for automobile manufacturers and magazines. Despite not having to pay the hefty F1 licensing fee anymore, the circuit continues to burn money every year in high maintenance costs.

However, Jaypee needs to be given credit for bringing F1 to India, after multiple similar projects in the country floundered.

The company is actively pushing for an F1 return and aims to bring more international races to the country such as the World Superbikes and MotoGP.

Once the conglomerate has reduced its debts to acceptable levels by next year and the tax issues sorted, the revival plan may no more seem like a far-fetched reality and the return of the Grand Prix more likely.

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Series Formula 1
Article type Analysis
Tags indian grand prix