Prime Minister Narendra Modi held a meeting on April 30 to develop a strategy to attract FDI, particularly foreign firms wanting to move out of China, to boost investment. In fact, the Indian government is reportedly in the process of identifying and developing 4.6 lakh hectares of land, including 1.1 lakh hectares of existing land in industrial areas, and planning fiscal incentives in the form of preferential tax rates, tax holidays etc in order to attract foreign firms. Further, a few state governments are also proactively working to capitalise on the opportunity.
The initiatives by the government are timely; they are coming at a time when foreign companies are looking to shift their production base out of China and their home countries are facilitating the move. Japan has announced $2 billion worth of incentives and Korea is encouraging its firms to shift from China too. It is not surprising that approximately one thousand companies are in discussions with the GoI to set up their production base in India. China has been the world’s factory for the last three decades mainly because of its FDI-led manufacturing exports. Almost 50 per cent of China’s growth comes from exports, creating millions of jobs.
Unlike the US, Italy, Spain and a few other countries, the COVID pandemic has, so far, not been severe in India in terms of both positive cases and fatality rate, if we normalise for the population. The initial stimulus package of Rs 1.7 lakh crore in March, followed by liquidity measures by the RBI and now, the stimulus package of Rs 20 lakh crore may help the Indian economy towards a vertical (V-shape) recovery. Therefore, post Covid, India could be the brightest spot among the emerging economies when it comes to attracting FDI. “Make in India” will become a success provided we prepare the ground and grab the opportunity.
Initially, China attracted foreign investors with decentralised and favourable FDI policy that had a lot of incentives with regard to land, utilities, infrastructure and logistics. Cheap labour, large SEZs, favourable pricing of inputs, and an under-valued currency facilitated and attracted foreign firms. However, these advantages have reached a saturation point. In fact, foreign firms are now dealing with a higher cost of production, higher wages, stricter environmental norms etc. Many foreign firms have consequently moved their production bases to Southeast Asian countries.
The situation for foreign firms in China has become more unfavourable in the last few years. First, the US-China tariff wars happened, which created uncertainty vis-a-vis trade and investment in China. Leading MNCs whose production facilities in China were part of their global value chain became suspicious about business viability and expansion there. The latest reason to now worry foreign firms is the origin of the coronavirus outbreak, and the lack of transparency in handling the pandemic — leading to a lack of trust of the major economies when it comes to China. The coronavirus outbreak in China disrupted the supply chain of the foreign firms, and it is also going to be the point of contention between China and the rest of the world.
Moreover, the fight for supremacy in technology and military, the differences between US-China on trade, intellectual property rights, and geo-political issues, are here to stay. Therefore, foreign companies which heavily depended on China are now looking to diversify the risk to their supply chain by moving out of China. And India offers them the best alternative.
India, the world’s fifth largest economy with an abundant labour force, offers the best alternative in terms of depth and size of the markets. With the median age of 27 and around 900 million “working-age” population, India is a young and aspirational economy. In the past, China used its huge labour force in manufacturing by attracting FDI — it’s time for India to do the same, particularly when foreign firms are looking for an alternative manufacturing base. According to a UNDP report, India will have a working age population of 1.14 billion, with rising urbanisation and a populating middle-class by 2025, creating a huge domestic market. India is also a resource-rich country. Therefore, India has its stage set to attract both market-seeking and resource-seeking FDI.
Starting from the early 1990s, India has progressively opened up sectors with hiked FDI equity to foreign investors under automatic routes. In recent years, there have been many proactive steps to facilitate foreign investors such as 24*7 online service to investors, response-query mechanism, proactive intervention with all the state governments, follow ups with all the GoI departments, reduction in documents for exports-imports from 11 to three, the Insolvency and Bankruptcy Code, and the creation of country specific (such as Japan and Korea) desks among others.
All these reforms resulted in India improving its ranking in the World Bank’s Ease of Doing Business report and also in the world competitive index in the last three years. No wonder, India has been ranked by multiple international bodies as one of the most favoured designations for FDI. Moreover, unlike China, India is a stable democracy where governance and rule-making is much more open and accountable.
However, simply opening of the sectors or the economy, and inviting foreign investors, will not be enough. We need to create a conducive and favourable business environment that enables foreign firms to manufacture at a competitive cost and use abundant resources like manpower. We need market reforms such as rationalising punitive land acquisition clauses and multiple labour laws, both at Centre and state level. It is time to speed up work on the four labour codes on industrial relations at a central level. The government should augment the work on infrastructure, logistics and trade facilitation so that trade and transaction costs, crucial for FDI firms, are reduced.
The need of the hour is also to redesign and revamp SEZs and EPZs policy for better performance. Though the reforms are very progressive at the central government and higher bureaucracy level, things are different at the level of state governments and lower bureaucracy — which actually matters when it comes to the implementation of projects and economic activities. It is time to train and bring about reforms at the lower bureaucracy level, which is not ready to give up their power. FDI will not only augment capital formation, it will also act as a vehicle for technology upgradation, skills development, exports promotion, job creation and the improvement of overall competitiveness of the economy. This is an opportunity for India in the post-Covid era. If we grab this opportunity, the next 30 years would belong to India at the global stage.
The writer is a professor at Institute of Economic Growth (IEG), Delhi
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