FDI in Indian economy

[op-ed snap] There is a contradiction in trying to attract foreign investors before reforming labour, land acquisition laws

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : FDI India - challenges

Context

India launched the Make in India campaign in 2014 with these words: “Sell anywhere but manufacture here.” 

Objectives

    • Emulate China — India wanted to emulate China in attracting foreign investment to industrialise India. 
    • Manufacturing growth – to increase the manufacturing sector’s growth rate to 12-14% per annum.
    • Manufacturing share – to increase this sector’s share in the economy from 16 to 25% of the GDP by 2022.
    • Employment – to create 100 million additional jobs by then.

Status of FDI & exports

    • FDI – Foreign direct investment has increased from $16 billion in 2013-14 to $36 billion in 2015-16. 
    • Stagnant – FDIs have plateaued since 2016 and are not contributing to India’s industrialisation. 
    • Declining – FDIs in the manufacturing sector are on the wane. In 2017-18, they were just above $7 billion, as against $9.6 billion in 2014-15. 
    • Services – they cornered most of the FDIs — $23.5 billion, more than three times that of the manufacturing sector.
    • Export-led growth – Few investors have been attracted by this prospect. India’s share in the global exports of manufactured products remains around 2% — China’s is around 18%.

Reasons for failure

    • Shell companies – a large fraction of the Indian FDI is neither foreign nor direct but comes from Mauritius-based shell companies. Most of these investments were “black money” from India, which was routed via Mauritius. 
    • Productivity – The productivity of Indian factories is low.
      • According to a McKinsey report, workers in India’s manufacturing sector are almost four and five times less productive than their counterparts in Thailand and China. 
      • This is not just because of insufficient skills, but also because the size of the industrial units is too small for attaining economies of scale, investing in modern equipment and developing supply chains. 
    • Small companies – Labour regulations are more complicated for plants with more than 100 employees. Government approval is required under the Industrial Disputes Act of 1947 before laying off any employees and the Contract Labour Act of 1970 requires government and employee approval for simple changes in an employee’s job description or duties.
    • Infrastructure is also a problem area. 
    • Although electricity costs are about the same in India and China, power outages are much higher in India.
    • Transportation takes much more time in India. 
      • According to Google Maps, it takes about 12.5 hours to travel the 1,213 km distance between Beijing to Shanghai. A Delhi to Mumbai trip of 1,414 km takes about 22 hours. 
      • Average speeds in China are about 100 km per hour, while in India, they are about 60 km per hour. 
      • Railways in India have saturated while Indian ports have constantly been outperformed by many Asian countries.
      • The 2016 World Bank’s Global Performance Index ranked India 35th among 160 countries. Singapore was ranked fifth, China 25th and Malaysia 32nd. 
      • The average ship turnaround time in Singapore was less than a day; in India, it was 2.04 days.
    • Governance – Bureaucratic procedures and corruption continue to make India less attractive to investors.
      • In the World Bank’s Ease of Doing Business index, India is ranked 77 among 190 countries. 
      • India ranks 78 out of 180 countries in Transparency International’s Corruption Perception Index
      • To acquire land to build a plant remains difficult. 
      • India has slipped 10 places in the latest annual Global Competitiveness Index compiled by the Geneva-based World Economic Forum (WEF).

Outcomes

    • There is clearly a contradiction in the attempt to attract foreign investors to Make in India before completing the reforms of labour and land acquisition laws. 
    • Liberalization is not the panacea for all that ails the economy, but it is a prerequisite if India intends to follow an export-oriented growth pattern.

Steps in the direction

    • Reduction of the company tax from about 35 to about 25% comparable with most of India’s neighbors. 
    • This is also consistent with the government’s effort to compete with Southeast Asian countries, to attract FDIs. 
    • In the context of the US-China trade dispute, several companies will shift their plants from China to other Asian countries. 
    • According to the Japanese financial firm Nomura, only three of the 56 companies that decided to relocate from China moved to India. Of them, Foxconn is a major player which will be now assembling its top-end iPhones in India.

New challenge

India will have to face another external challenge too as it sees capital fleeing the country. The net outflow of capital has jumped as the rupee has dropped from 54 a dollar in 2013 to more than 70 to a dollar in 2019.

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