Mixed messaging: On India as an investment destination

Context:

• The article analyzes the issue of foreign investment in the Indian economy.
• In his recent address to the U.S.-India Strategic Partnership Forum, the Indian Prime Minister pitching India as an investment destination called for higher foreign investments into India.
• The PM laid out a vision of making India a manufacturing hub at the heart of global supply chains.
• The pitch comes in the backdrop of the government’s keenness to lure potential investors, especially those looking to relocate from China to India.

Steps to be taken by India:

• The worsening relationship between the U.S. and China and the ongoing trade stand-off between the world’s two largest economies present a unique opportunity for India to woo U.S. investors and multinationals looking to shift from China to set up their bases in India.
• Even if a few multinational enterprises can be drawn to set up manufacturing bases, either by shifting facilities or as new additional plants, this would benefit the Indian economy through increased FDI, new jobs and higher tax revenue for the government.
• There is also strategic significance involved in the pitch given the escalating border feud between India and China and India’s economic and trade ties with China.

Issues:

• Despite the right intentions, the recent government measures seem to be sending the wrong messages to potential foreign investors.

1. ‘Aatmanirbhar Bharat’ initiative:

• The article argues that the government’s recent ‘Aatmanirbhar Bharat’ initiative, of making India more self-reliant, would send a wrong signal to foreign investors.
• Several ministries have urged companies and industry sectors to adopt the policy of ‘import substitution’- to replace imports with ‘Made in India’ substitutes.
• This could be perceived by the foreign investors as undesired regulation, as they too could be asked to source capital goods locally.
• Global FDI investors prioritise policy stability even at the cost of lower profits and favour largely barrier-free access to local and international markets.

2. Decision to not be part of the RCEP:

• India’s decision to not join the RCEP multilateral trade pact is being viewed negatively by foreign investors as this would put investor companies seeking to tap consumers in RCEP member countries at a tariff disadvantage. This would restrict their market access in these countries.

3. The nature of FDI inflow into India:

• Between April-July 2020, the Foreign Direct Investment (FDI) into India stood at $20 billion.
• Despite the good inflow of FDI even during the time of COVID-19 into India, there continue to remain concerns over the nature of the FDI inflows into India.
• Most of the recent FDI announcements have been by way of stake acquisitions in existing businesses, and predominantly in the services sector. These do not produce other desirable outcomes that are expected with FDI like the inflow of better technology and the creation of additional employment opportunities.
• The FDI into manufacturing has been comparatively low.

Way forward:

• India’s efforts to attract capital will not result in substantial FDI flow until investors see policy stability.
• The government will have to convince investors that it is committed to an open, barrier-free global trade and investment order.
• Also, the attempts to lure higher foreign investments into India should be supplemented with parallel efforts to explore supply-chain synergies with other economies.