Make-in-India-campaign-IASToppers
Editorial Notes

[Editorial Notes] Contradiction in trying to attract foreign investors

Make in India has failed to deliver because i) a large fraction of the Indian FDI is neither foreign nor direct but comes from Mauritius-based shell companies and ii) the productivity of Indian factories is low.
By IASToppers
October 22, 2019

Contents

  • Introduction
  • Contrasting results of Make in India campaign
  • Why has Make in India failed to deliver?
  • Conclusion

Contradiction in trying to attract foreign investors

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Introduction

  • Prime Minister of India launched the Make in India campaign in September, 2014 to emulate China in attracting foreign investment in India.

Make_In_India-1

  • The objective of campaign was to increase the manufacturing sector’s growth rate to 12-14 % per annum in order to increase this sector’s share in the economy from 16 to 25 % of the GDP by 2022 and to create 100 million additional jobs by then.

Contrasting results of Make in India campaign

Make_In_India-2

  • Foreign direct investment (FDI) has increased from $16 billion in 2013-14 to $36 billion in 2015-16. However, FDIs have been in stagnant position since 2016 and are not contributing to India’s industrialisation.
  • In 2017-18, FDIs in the manufacturing sector were just above $7 billion, as against $9.6 billion in 2014-15. On the other hand, Services attracted more than three times of FDI than the manufacturing sector.
  • This shows that the services sector is the key driver of India’s economic growth. Hence, to develop the industrial base, ‘Make in India’ was initiated to promote export-led growth by inviting Foreign investors to make in India, not necessarily for India.
  • However, few investors have been attracted by this prospect, and India’s share in the global exports of manufactured products remains around 2 % while that of China is 18 %.

Why has Make in India failed to deliver?

Most of FDI are not truly foreign

FDI

  • A large fraction of the Indian FDI is neither foreign nor direct but comes from Mauritius-based shell companies. Indian tax authorities suspected that most of these investments were black money from India, which was routed via Mauritius.

Low productivity of factories

  • The productivity of Indian factories is low. Workers in India’s manufacturing sector are almost 4-5 times less productive than their counterparts in Thailand and China.
  • This is because of insufficient skills, too small industrial units size, is too small for attaining economies of scale and small investing in modern equipment and developing supply chains.
  • The reason why companies are small is because of the fact that labour regulations are complicated for plants with more than 100 employees.
  • Moreover, Government approval is required under the Industrial Disputes Act of 1947 before laying off any employee and the Contract Labour Act of 1970 requires government and employee approval for simple changes in an employee’s job description or duties.

Infrastructure

  • Although electricity costs are about the same in India and China, power outages are much higher in India.

Transportation

  • Transportation takes much more time in India. 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 (working at full capacity) while Indian ports have constantly been outperformed by many Asian countries.
  • The 2016 World Bank’s Global Logistics Performance Index ranked India 35th among 160 countries, behind Singapore (5th), China (25th) and Malaysia (32nd). The average ship turnaround time in Singapore was less than a day; in India, it was 2.04 days.

Bureaucratic procedures and corruption

  • Bureaucratic procedures and corruption continue to make India less attractive for investors. In the World Bank’s Ease of Doing Business index, India ranked 77th among 190 countries.

the-World-Bank’s-Ease-of-Doing-Business-index

  • India ranks 78 out of 180 countries in Transparency International’s Corruption Perception Index. India has slipped 10 places in the latest annual Global Competitiveness Index compiled by World Economic Forum.

US-China trade dispute

US-China-trade-dispute

  • Giving boost to Liberalisation, a significant move was made in September 2019 with the reduction of the company tax from about 35 to about 25 %. This reform is also consistent with the government’s effort to compete with South East Asian countries, in particular, to attract FDIs.
  • This competition of attracting FDIs among various countries has acquired a new dimension in the context of the US-China trade dispute. After the US increases tariffs on Chinese exports to the US, several companies will shift their plants from China to other Asian countries. However, only three of the 56 companies that decided to relocate from China moved to India.

Capital fleeing from India

  • Also, India will have to face challenge of 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.

Conclusion

  • There was clearly a contradiction in the attempt to attract foreign investors to Make in India before completing the reforms of labour and land acquisition laws.
  • Liberalisation 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.

 

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Editorial Notes Mains 2020
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