Millennium Post

Other side of India's golden state

Vibrant Gujarat Global Investors Summit’ – the Modi magic to mesmerise the foreign investors – witnessed less enthusiasm from them to pour their money into Gujarat than making formal commitments. During the five biennial summits between 2003 and 2011, the state government claimed that MoU worth $893 billion were signed for foreign investment in Gujarat. Against this, the actual flow of FDI was only $8 billion in 2000-2012, or less than one per cent of the MoU signed. Notwithstanding the political mayhem of 2002, which alienated Gujarat from the international relationship, foreign investors thronged at biennial summits of Vibrant Gujarat. The notion of Vibrant Gujarat was hyped further by the shifting of Tata Nano project from Singur in West Bengal to Sanand in Gujarat in 2008. Since then, the foreign participations in the Vibrant Gujarat summit had quadrupled. Is Modi magic ebbing despite the fact that Gujarat achieved highest growth in GDP during Modi regime?

Gujarat witnessed an erratic trend in FDI flow since ‘Vibrant Gujarat Global Summit’ was launched in 2003. The impact of the summit was felt only in 2008-2009, when FDI surged in the state. FDI in Gujarat jumped to $2,826 million in 2008-2009. Prior to this, during the preceding two years the average annual FDI flow was $300-360 million. FDI slid to $807 million in 2009-2010 and further dipped to $493 million in 2012-2013. One school of thought viewed the surge in FDI in 2008-2009 was the impact of Tata’s shifting of NANO project from Singur in West Bengal to Sanand in Gujarat. These demonstrate that Tata’s shifting of Nano impelled the foreign investors to pour their money into Gujarat, without quite buying the idea of Vibrant Gujarat. Tata’s shifting also inspired other auto MNCs to invest in Gujarat, which are in the offing, such as Maruti, Ford, General Motors and Peugeot.
On the other hand, the domestic investment in Gujarat surged after the ‘Vibrant Gujarat’ summit. Domestic investment in Gujarat sparked from Rs 10,710 crore in 2003 to Rs 2,49,055 crore 2011. This unveiled that ‘Vibrant Gujarat’ has a bigger impact on domestic investment than foreign investment, even though the summit hogged the limelight as a global summit. These trends demonstrate that notwithstanding strong economic fundamentals in Gujarat, which should have ideally lured in the foreign investors, the latter were not enchanted enough to pour their money into the state. Gujarat has had a high trajectory of economic growth after the ‘Vibrant Gujarat’ summit. The state recorded the highest growth in GDP amongst all states in the country. During 2004-2005 to 2010-2011, the average annual growth in GDP in Gujarat was 16.6 per cent. Being the chemical hub for India, over 51 per cent of chemical production is derived from Gujarat. It has the county’s highest on-shore oil production and the country’s biggest oil refinery and the main base for pharmaceutical industries.

However, even though Gujarat was projected as the most FDI-friendly governed state in the country after ‘Vibrant Gujarat’, then, why was it then foreign investors did not respond in the same measure?  No analysis has been made for the reasons for the failure to lure in the actual investment.  However, there are divergent views among several think tanks. One view is that lack of state federal power dismayed the foreign investors. State needs federal power to induce the foreign investors’ sentiment to invest. The state government should have sovereignty in financial powers and development of infrastructure facilities. In other words, state government should have a substantial stake in granting fiscal incentives and the basic infrastructure facilities such as land, power, road and rail links to the foreign investors. In the so-called federal structures of India, states are shackled to provide adequate fiscal incentives and infrastructure facilities like land, power, road and rail linkages. For every major fiscal and infrastructure facility, states have to yearn for the Centre’s help. These factors negate the State government’s capabilities to attract the foreign investors. Unlike the developed countries, states in India have paltry shares in tax revenue and hence little resources to provide power, port, road and rail facilities to the investors.          

At present, the major hindrance to the actual flow of foreign investment in Gujarat could be the land availability to the foreign investors. The Land Acquisition Bill is pending in the Parliament. Unless the Bill is enacted into Act, foreign investors’ confidences would keep wobbling for investment. Land bank seemed to have exhausted by the galore of SEZs in the state. Gujarat ranks at the top in the country in terms of area allocated under SEZ. Given the situation, the explanation suggests that rapid growth in SEZs in Gujarat led the land shortage for the investors.

Another explanation suggests that Gujarat’s attraction emerged as the manufacturing destination after China’s attractiveness ebbed with the Lehman shock. Lehman shock in 2008 had an opposite impact of China’s attractiveness in India, since China was an export-based economy. Globally, the shock led to a shift in FDI attraction from export-based economy to domestic-oriented economy. Foreign investors turned their faces towards domestic demand-oriented economies. India pitched for higher FDI attraction by the legacy of its big domestic demand, catapulted by its large middle-income group population, and also by its non-ageing society characteristic. This led to Gujarat scoring higher points because of its high growth performance in the country. At this point, the much-hyped ‘Vibrant Gujarat’ spurred the foreign investors to have second thought for investment in India. In Vibrant Gujarat summit 2013, held in January, more than 100 Japanese thronged to test the Gujarat soil for investment.   

The Japanese subsidiary, Maruti – the largest car manufacturer in the country – made a debut in Gujarat with the intention of manufacturing largest number of cars in the country. Similarly, a slew of auto MNCs are in the queue to enter Gujarat. However, no fresh major investment was debuted by the foreign investors, excepting by a Japanese sanitary ware manufacturer, Toto of Japan. Most of the big investments by auto MNCs, which are in the offing, are the expansion of already existing foreign investment projects in India.

In nutshell, the ‘Vibrant Gujarat’ summit alone is not enough to attract the foreign investment in Gujarat. It needs to be proactive in expediting the Central projects, like DMIC (Delhi Mumbai Industrial Corridor) and help the Centre in clearing the passage for Land Acquisition Bill. Political enmity will tame the vibration of Gujarat as the best possible destination for foreign investment in India. IPA

The author is Adviser, Japan External Trade Organisation, New Delhi

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