Make-in-India under pressure
Close on the heels of demonetisation owes, impacting domestic consumption and production of all important articles through the last quarter of 2016, India’s industrial growth in 2017 may come under severe pressure following a global apprehension of the United States going for a strong protectionist policy with its ‘Make-in-America’ agenda. India may not be a major trading partner of the USA. But, it has been running a positive balance of trade with the country despite a massive defence import. India’s information technology (IT) sector, manufacturing industry, in general, and drug exporters, in particular, are worried. And, so are those US companies which want to make significant investments in India to tap its growing domestic market and export the surplus. Also, India, which emerged as the world’s top FDI destination in 2015 surpassing both China and the US, may suddenly witness a slump in foreign direct investment as a result of a global shift in investment policies to protect domestic market and employment.
The FDI inflow into India in 2016, until the currency demonetisation-led market upheavals, too had been quite encouraging. However, the year-end developments in India’s currency market and the management tussle in the country’s largest business conglomerate, having a gross turnover of over $100 billion and controlled by Tata Sons, portend evil for 2017. The immediate impact of demonetisation of high-value currencies, ostensibly to fight black money, terror funds and fake notes, on the common man has been rather stressful, if not disastrous. Given the size of the low-income urban and rural population, the poor rural reach of the banking sector and century-old cash saving and transaction habits of the people in a country where the total population tops the 1.25 billion mark, any major currency demonetisation is bound to contain a highly large risk factor and social chaos. While the government, banks, and the people are faced with an unforeseen and almost unbearable situation, all these factors are bound to have an additional adverse effect on the FDI inflow into the country in 2017.
For domestic political parties, it may be difficult to digest the fact that the country’s industrial growth is no longer in the hands of traditional Indian industrial entrepreneurs and businesspeople. It has been mostly FDI-driven since the beginning of the 10-year-long UPA regime in 2004. Thanks to the government policies, a good number of local entrepreneurs has become a significant burden on India’s banking sector handing it down huge non-performing assets while most others, including the Tatas, have been struggling to retain their share of the market against stiff competition and imports. The FDI has been the only major source of fresh investment. FDI-supported projects are sharp and business competitive in content and style. It has come to the rescue of industry, meeting growing domestic demand for automobiles, cell phones, e-commerce, lifestyle products, infrastructure, air travel, and what-have-you.
Foreign entrepreneurs, mostly from the US, China, EU, Korea and Japan, found India a great place to invest. Last year, India received $63 billion in FDI. It attracted new FDI proposals of $31 billion compared to $28 billion by China and $27 billion by the US. The arithmetic may sharply change after January 20, 2017, by which President Donald Trump and his team, riding an anti-globalisation verdict, will be in full control of the situation to convert the job-starved and import-led US economy into a major manufacturing powerhouse again. The proposed ‘Make-in-USA’ agenda will severely affect China, America’s biggest trading partner, and partly other countries such as those in EU, Japan, Korea, and India. Export-led China’s massive economic growth in the last 25 years has been mostly at the cost of the US. Large EU nations, Japan and Korea were also big exporters to the US. Comparatively, import-oriented India, running big trade deficits over the years, has never been a threat to the US economy although the country’s IT companies and generic drug producers are worried about their prospects in 2017.
For example, Infosys, India’s largest software group, is bracing for pressure on its big US business from President Trump’s predicted anti-immigrant policies. During his election campaign, Trump had identified clamping down on immigration as one of his three top priorities. “Margins might be impacted in the near term,” Infosys chief executive Vishal Sikka confessed a few days ago, adding that the company had not yet done any simulations on how large the impact may turn out to be. The situation may not come any different for other Indian IT biggies such as Tata Consultancy Services, Wipro, and Mahindra although they have not publicly reacted to the possible US business environment. However, more than IT industry’s concern, it is the inflow of FDI into domestic projects, especially from the US, directly or through offshore routes, that is the cause of major worry before the country and government.
Broadly, FDI inflows operate in India, as also elsewhere, by (a) incorporating a wholly-owned subsidiary or company, (b) acquiring shares in associate enterprises, (c) through merger or an acquisition of an unrelated or related enterprise, and lastly, (d) participating in an equity joint venture with another investor or enterprise. Thanks to incentives-backed foreign investment laws in the past, nine out of the ten foreign companies invested in India for almost ten years through April 2000 to January 2011 were Mauritius-based. The focus has now shifted to Singapore. Companies like Cairn UK Holding, Oracle Global, Vodafone of the UK, Etisalat, and Merrill Lynch entered India through the Mauritius route. Now, there are genuine worries about the possible inflow of nearly $30 billion worth FDI from the US alone in 2017 and 2018. Among them are several top US companies such as Honeywell International, Apple Inc. Uber, Amazon, Banana Republic, PepsiCo, and General Electric.
(The views expressed are strictly personal.)