Is ‘MAKE IN INDIA’ Losing Its Steam?

The ‘Make in India’ initiative is a compendium of existing policies. After the arrival of the Narendra Modi-led government, there was a lot of hope that with better governance, India can attract huge sums from potential foreign investors and prevent the domestic investors from leaving the country. However, the current administration’s ‘Make in India’ initiative has offered little to investors. An important aspect of the ‘Make in India’ initiative was the prospect of easing bureaucratic procedures, which would enhance the investor’s initiative towards expanding investment in India. Some of the key barriers to enhanced foreign investment are difficulties in land acquisition, a non- transparent tax system, delay in the implementation of the Goods and Services Tax regime and a reluctance towards allowing multi-brand retail to make its way into India.

Twenty five industries have been highlighted in the ‘Make in India’ campaign. The campaign, however, did not highlight the special characteristic of each industry. Without such detailed assessments, the government cannot create an environment, wherein such domestic industries move towards a comparative advantage over their competitors in other countries. Despite the exponential potential for growth in the world economy, key domestic sectors like leather, defence, oil and natural gas, mining and space present a limited scope to woo investors. 

Without liberalising the environment for foreign direct investment in the defence sector, India will fail to stoke foreign investment. There are two factors which will cast a shadow over the process of  liberalisation. First, the propensity for investment in defence lies with the big industrial houses and not small and medium enterprises (SMEs). Under the current global investment trend, SMEs are actively participating in the international production network, steered by a growing free trade agreement (FTA). The second point refers to the sale of defence equipment the government. 

However, with no guarantees of purchase from the government, FDI in defence is unlikely to stir up investor sentiment. Export of arms and ammunition are subject to stringent regulations and are applicable to national Ordinance Factories. An investment spree in oil and natural gas production is murky, since the country possesses deficient amounts of oil reserves. Private investors in refineries are disillusioned with heavy government subsidies on major petroleum products, such as kerosene and LPG.

More doses of policy liberalisations were put to create renewed interests among the foreign investors in the construction sector. The clause surrounding the lock-in period for three years was abandoned. Moreover, the mandatory requirement of 10 hectares, in case of serviced housing plots, was done away with. But, where is the land for enhanced FDI in the construction sector? After the new Land Acquisition Act, 2013, no fresh land was allocated. It takes three to four  years to acquire a piece of land under the new law.

Given the rapid growth of FTA, global manufacturing has made a rapid transformational shift to cross-border manufacturing activities. This shift has churned out a new concept of manufacturing. At present, it is an expansion of the industry’s manufacturing capacity, via a ‘One plus One’ strategy. This initiative gave birth to China +1 and Thailand +1 strategy, which they have used to woo foreign investors. Foreign investors, who have flogged into China and Thailand, are restricting their plan to expand in China and Thailand, besides diversifying their expansion in low-cost and low political risk countries, such as in Vietnam, Myanmar and Indonesia. This provides a leg up to foreign investors to insulate their investment in China and Thailand. China plunged into a loss of low cost production and Thailand embraced political turmoil. China+1 and Thailand +1 strategies are gaining prominence among other East Asian investors. FTA has added yet another stimulant to the China +1 and Thailand +1 investment strategy to Japanese investors, especially.

‘Make In India’ did not offer any new fiscal incentives, which is a core investor demand. At 33 per cent corporate tax and 26- 28 percent custom duty, business taxes in India are one of the highest in the world. With per capita income reeling under low levels, combined with high business taxes, large domestic demand in the country also remains ineffective. Our large domestic demand is the main driver for greater investment, according to the Modi-led government These taxes act counter to the expansion of domestic demand and deter investors. Prime Minister Narendra Modi does not seem to believe in incentives. As far as I can see,  Modi believes that a large and sustainable middle class market in India should be a magnet that woos investors. “An investor’s decision to invest is not so much influenced by incentive schemes as by the existing growth environment and investment security,” he said. “Industrialist don’t come due to some fancy incentive scheme…or that tax free. We will assure investors that their investments won’t sink and also guarantee a stable policy regime.”

But fiscal incentives and reforms are imperative to bring in greater investment. Tax incentive has always been the tool used by China to attract foreign investors. In the first stage of reform, China granted special tax incentives for domestic investors over their foreign counterparts. In the second stage, China accelerated tax breaks to encourage enterprises to upgrade their equipment and increase research and development to improve its manufacturing industry. The anomaly of retrospective tax system in India has stirred up deep suspicion among major foreign investors, who rely more on mergers and acquisitions (M&A). Such methods have emerged as an active route for foreign investment in the world. Green-field investment has suffered a big backlash after the Lehman shock. As a result, a transparent tax environment has almost become a pre-requisite for any big ticket investment. In fact, after the Vodafone episode, India earned an image for tax- terrorism in the global economy.

The priority of the ‘Make In India’ should be to prop up the wish-list of investors rather than blowing holes into the potential of each industrial sector.