China with India Characteristics

Business Standard     17th September 2020     Save    
QEP Pocket Notes

Context: While recently, the Foreign Direct Investments have risen even amidst pandemic, they are challenged by the structural deficiencies and skewed nature.

Background: 

  • Government’s pitch to promote India as an alternative investment destination to China.
  • Rise in Investments: 
    • India has attracted $20 billion worth of foreign investment between April and July 2020- when the global economy has contracted sharply owing to the pandemic — India more than any other emerging market. 
    • It accounts for about 27% of FY20’s full-year figure of $73.5 billion is certainly astonishing.

Issues with Investments in India

  • Skewed investment:  
  • For, E.g. $15-billion that Reliance Industries has attracted to its telecom and entertainment subsidiary Jio Platforms
    • Sectoral imbalance- services, IT and telecom account for over a third of inflows. For E. g-Investments by Amazon in its Indian subsidiary and by the venture capital/private equity funding for start-ups.
  • Mega greenfield projects: that create millions of jobs have attracted less FDI.
  • Inconsistent FDI: While the FDI touched highs of 25% and 23% in FY15 and FY16, due to programmes like Make in India, Start-Up India.
  • Later FDI growth declined to 8%, 1% & 2% in FYs 17, 18 and 19 respectively due to various events like the advance deadline for Goods and Services Tax (GST) and demonetization.
  • Socialism with Indian characteristics:  high taxation regime and heavy duties and other issues that cause discomfort to investors
    • Toyota has been in India since 1997 and has rolled back an expansion plan on account of the heavy levies on what policy-makers see as “luxury cars”.
    • General Motors too exited India in 2017 and Ford to move its assets into a joint venture with Mahindra & Mahindra (another way of exiting).
  • Structural constraints: on land, labour and capital
  • Policy shifts:  related to retrospective taxation non-level playing fields in e-commerce and telecom to rising tariff barriers

Conclusion: Serious structural and policy reforms are needed to attract foreign direct investors that are willing to put their faith in “entrepreneurship with Indian characteristics”.

QEP Pocket Notes