Why FDI is not enough for Modi’s ‘Make in India’ strategy

Author: Geethanjali Nataraj, Observer Research Foundation

India has pulled ahead of China and United States as the most favoured destination for foreign direct investment (FDI). According to the Financial Times (FT), India received US$31 billion in FDI in 2015, which is US$3 and US$4 billion more than China and the United States respectively. Moving from fifth place in 2014 to first certainly reiterates that India is a bright spot in the world economy today.

But is being number one good enough to make the Modi government’s ‘Make in India’ productivity reform a success story and achieve its desired 8–8.5 per cent growth?

An Indian laborer pulls a cart loaded with metal rods at a market in the morning in New Delhi, India, Wednesday, Sept. 30, 2015. "In India, a tentative economic recovery is underway, but is still far from robust," Asia's third-largest economy 's central bank said in its policy statement (Photo: AAP).The FT’s ranking recognises India’s efforts to boost investment through a number of reform measures. India is a good market to invest in as other emerging economies — including China — are rapidly slowing. This is also evident from the 2015 World Economic Forum’s report that has placed India at 55 among the world’s most competitive economies — 16 positions higher than China.

But there are discrepancies in the FDI inflows data used by the FT and by the Reserve Bank of India (RBI). The FT puts FDI inflows (estimated capital expenditure) to India at US$31 billion in first half of 2015, whereas the RBI’s figure of net FDI inflows for the same period is US$19 billion. But this is because the FT measures actual and announced transactions, while the RBI only measures the former.

The data show that FDI inflows to India have increased during a period of global declines in FDI. FDI outflows from India have drastically decreased from US$9 billion in first half of 2014 to US$1.6 billion for the same period in 2015. This suggests that domestic and foreign investors recognise the efforts of the government to improve the investment environment to sustain growth.

But it would be incorrect to celebrate India overtaking China in FDI inflows. There are also discrepancies in the FT’s Chinese FDI figures. China’s National Statistical Bureau put FDI inflows to China at US$68 billion, compared to the FT’s US$28 billion. But, more importantly, China has a larger stock of FDI available. In 2013, China’s per capita FDI stock was US$691, compared to India’s US$181. China has had more FDI for longer than India, which has contributed to technology development, exports, competitiveness and growth.

And even if India celebrates being the top destination for FDI, it needs to back up the celebrations with actions on the ground. India still ranks 142 out of the 189 countries in the World Bank’s ‘ease of doing business indicators’.

India needs to develop infrastructure further. Although the transport minister is very proactive in making new roads, India has a long way to go when it comes to energy, telecommunication and other modes of transportation. Many Indian power companies are ailing because of their bad balance sheets and bankrupt state electricity boards. The government is not in a position to meet the required infrastructure investment. India must develop a better regulatory mechanism and a rational pricing system. It needs to reform financial markets and strengthen dispute resolution mechanisms so that the private sector can find infrastructure projects economically feasible.

India must also address land acquisition, which is crucial to ‘Make in India’. But this is a politically difficult move. Land acquisition is governed by the states rather than the central government. Although the federal government is pushing for higher growth, which may force states to promote land acquisition, state governments are being held back by a narrow pro-poor and pro-farmer politics. The infrastructure for a unified market needs to be designed and executed at the top, not by states in bits and pieces.

India needs to improve governance and streamline the process of registering and clearing new initiatives. It must reduce — or at least rationalise — the number of clearances for setting up business; develop a coordination mechanism between central and state level departments; and promote e-governance extensively for transparency and efficiency. If India manages to do this, it will go a long way.

It’s high time that the central government works seriously with the states on policy coordination for investment and FDI. Even though it is politically contentious, it is time to revisit the rigid and old labour rules. The Indian labour force is accommodative to investment, but current rules still scare investors — particularly foreign investors.

The Union government has taken some steps like the ‘unified labour and industrial portal’ and the ‘labour inspection scheme’. The state of Rajasthan has also gone for comprehensive reforms, but the Indian economy as a whole needs to move on this issue. India must invite sustained inflows to help Indian firms ascend the technology ladder. This will be possible if India improves intellectual property rights to incentivise, and give protection to, innovation. Foreign investors are currently scared to share their technology or establish joint ventures in India because of the lack of intellectual property rights.

If the Indian government is serious about capitalising on its new position as most favoured destination for FDI, it will need many more changes on the ground. It may be true that India is number one for FDI, but this won’t be enough.

Geethanjali Nataraj is a senior fellow at the Observer Research Foundation, and a policy leader in the Knowledge Partnership Programme between IPE Global and the Indian branch of the United Kingdom’s Department for International Development(DFID).

 

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