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Easing FDI norms

Indian government should prompt major reforms in FDI to counter the growth downtrend

Easing FDI norms
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Dissection of the slow growth of the Indian economy has revealed that sagging domestic investment and slump in demand has dragged the growth into a downtrend. Domestic investors have been shy and consumers, hesitant to spend. Growth in construction, in turn, felt the pinch caused by the wiping out of black money and sales of automobiles tumbled.

India has reeled under the constant pressure of downturn in GDP growth in 2019-20, leveraging a panic for jobless growth and entering a recession. Since last year, GDP growth witnessed an unabated downswing, from 7 per cent in July-September 2018 to 4.5 per cent in July-September 2019. Paranoia loomed large over the recovery of growth and the country faces public anger over the spiralling of onion prices, blaming it as a failure of government policies.

Nevertheless, there was some respite from foreign investment. While the investment from private and government sectors plunged, investment from foreign sector made a boom. Since the role of foreign investment is not significant in the total investment, it has failed to impart a major compensatory impact on the overall investment in the country. Foreign investment accounted for one-sixth of overall investment in new projects in 2018-19.

Domestic private sector is the core investor in the country. It accounted for 47 per cent of the total investment in new projects in 2018-19. It declined sharply by 21 per cent in between 2014-15 to 2018-19, from 8,460.9 billion rupees in 2014-15 to 5,686.8 billion rupees in 2018-19. Government investment (such as infrastructure and others) slipped drastically from 11,825.7 billion rupees in 2014-15 to 4,411.6 billion rupees in 2018-19, in hopes that the private sector would pour more cash into the sectors vacated by the government. It relied on the success of Make in India, which would have helped the private sector to invest in these sectors after reaping benefits of the scheme. Alas, Make in India failed.

It was only the foreign investment which pitched for high growth. It increased by 147 per cent, going from 825.5 billion rupees in 2014-15 to 2043.1 billion rupees in 2018-19.

This landscape of the investment strategies means that while foreign investors continued to repose confidence in Modi's investment-friendly leadership, the private sector was reined in by suspicion. Even the political row between India and China could not deter Chinese investment, which is a fast-growing engine for foreign investment. Chinese investment increased by over 136 per cent in 2018 over 2017, from USD 165.2 million dollars in 2017 to USD 391.2 million dollars in 2018.

Even during the first half of the current year, when GDP was witnessing a constant slip in growth, such a happening could not dent the zeal of foreign investment. During the first half of 2019 (January–June), foreign investment climbed 25 per cent.

This would mean that foreign investors were not unnerved by the contraction in GDP. Global rating agency Standard & Poor viewed the downswing as a cyclic phenomenon. It said "India remains a growth outperformer on long term basis….. The current slowdown is largely cyclical and the growth is expected to improve on the basis of an uptick in consumption, stable oil prices and strong monetary policies".

FDI Intelligence — a global greenfield investment tracker — said: "manufacturing FDI is on an upward curve". There was a 40 per cent growth in manufacturing FDI in India between 2017 and 2018. Against this backdrop, India should prompt major reforms in FDI policies. Recently, some attempts were made to simplify FDI policies in retail trade. Given the rising role of foreign investment in the absence of domestic investors, India needs major reforms to lure foreign investors. To this end, a lesson from China is imperative to instilling FDI charm in the country.

China has been the second-biggest recipient of FDI in the world. Even then, China apprehended a fall in FDI in pursuance to GDP contraction. GDP in China grew by 6.6 per cent in 2018 which was its slowest pace of growth in the last 18 years. This prompted China to introduce major reforms in its FDI policy.

China decided to adopt a four-pronged strategy in its new FIL (Foreign Investment Law). It will be operative from January 1, 2020. It decided to offer national treatment to the foreign investors, equal rights for government procurement, banning the mandatory transfer of technology and adequate protection to Intellectual Property Rights.

India also opened its door substantially to foreign investors. But, it does not provide national treatment and equal right for government procurement. Both have become essential from the point of view of political sensitiveness in the country due to multi-party dominance and government procurement providing a big market. Banning FDI in multi-brand retail after the defeat of UPA synchronises the political sensitiveness of the policy. In this respect, national treatment augurs well for major security to foreign investors.

In addition, foreign investment is envisioned as a key driver for GVC (Global Value Chain) manufacturing. This is the current trend of global manufacturing dynamism.

After a reduction in corporate tax rates and rationalisation of GST, India is at par with ASEAN corporate tax structures. With the engagement in FTA, opportunities opened for GVC manufacturing between India and ASEAN. To this end, the success story of the Japanese auto industry, overarching India and ASEAN is a case in point.

To produce cheap cars, Toyota Motor Company adopted a unique GVC model for manufacturing auto parts. It embraced India and five other nations of ASEAN for manufacturing different parts, given the competitiveness of each nation. India was selected for manual transmission (large type), Thailand for diesel engine, press parts and axle. The Philippines was chosen for manual transmission (middle type) and switches, Malaysia for engine computer, Indonesia for gasoline engine and Singapore for sales and logistic.

This signifies India's manufacturing ability and potential for certain segments of automobiles in the model of GVC manufacturing. However, this is possible only when India also offers similar or greater incentives to foreign investors.

China, despite being the world's second-biggest recipient of FDI, envisioned that the time is ripe for major reforms to attract foreign investors. India must wake up to the same and inject reforms to infuse foreign investment as an alternative to sagging domestic investment.

Views expressed are strictly personal

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