India has a unique window to get a larger slice of global FDI.
Creating an FDI friendly environment is a comprehensive exercise where several aspects of policy call for simultaneous attention. To make a perceptible difference, many of the instruments of governance and management of the economy must be firing on all cylinders for a sustained period of time. Prima facie a tall order; it is now a hard fact of life in this competitive world with fluid borders. Most of the 195 nations of the world, including the rich, are actively competing against each other for external investments. Only the ones offering the maximum opportunities to earn high returns for a long period, while balancing the safety of the investment, are able to emerge on top.
The Chinese success in attracting foreign money to modernize itself and ameliorate its widespread poverty demonstrates just how exhaustive the process of courting is. While Mao Zedong had opened the country’s doors to foreign capital and enterprise, progress was comprehensively materialized by his successor Deng Xiaoping in the mid 1970s and 1980s. He had surprised the world by his uncanny wisdom in effecting changes across the entire spectrum of economic and social ideologies—except of course, the political and administrative set up that has remained a fixture since the communist revolution of 1948. Open mindedness, a willingness to experiment and flexibility of approach to get foreign capital and technology became the national hallmarks over the following decades. These changes caused western nations with their deep pockets and modern modes of production to rush in, almost incessantly. Deng had even foreseen that his model of foreign capital supported development, could allow “some people to get rich first”, with the common prosperity promised by Mao following later.
This Chinese variety of realism has lessons for all foreign capital-seekers. Despite its huge reserves of manpower and vast poverty in rural areas, China took some very real risks—for instance, they made “hiring and firing” of workmen feasible for foreign investors, as well as their supply chain partners. A similarly placed India may also have to move away from the practice of appeasing trade unions (who look after only 10% of the organized work force and that too largely in the extensive network of public sector enterprises) and extend similar concessions to firms in which a majority stake is held by a foreign entity. Of course, adequate guardrails need to remain such as ensuring workers subject to such “insecurity” are being paid higher negotiated wages and social security benefits beyond the defined minimum. Such a change need not remain confined to only a handful of industries but should be across the entire range of manufacturing, which for bringing in FDI is already on the “automatic route”, and where getting even more investment and advanced technology is the need of the hour.
Another “doable” initiative is extending a justiciable assurance to foreign investors that Indian authorities will not suddenly alter the existing scheme of regulations applicable to them. Much was made by such investors and their governments about the manner in which the terms of business were dramatically revised for players in e-commerce, insurance and personal data storage. Consequently, the Union government and concerned state governments should prescribe through an omnibus new statute that except in the case of urgent national security considerations, no amended provision in a statute or regulation would be applicable only to foreign operating businesses without elaborate consultations with them. In fact, even in the formulation of additional restrictive regulations applicable only to new overseas investors, the standard practice should be to hold extensive stakeholder consultations first, and then put out in the public domain the drafts of all new regulations before implementation.
Accepting a few checks on its own executive powers along the lines indicated should dramatically increase transparency and predictability in the Indian FDI regime. SEBI, which enforces corporate governance standards, and the RBI, which is responsible for regulating the banking industry, already follow such a consultative route and rarely make overnight changes. The Insolvency & Bankruptcy Code, 2016 has also been well received as it provides opportunity for creditors to successfully negotiate with debtors, and enhances the ability to realise dues. Several of the existing alternate mechanisms for dispute resolution need to be consistently honed further. The formal legal system to which most solutions of such fora get referred also needs urgent revamping. The long procedural delays experienced frequently are attributable mainly to the inadequate number of judges and the inordinate delays in filling judicial vacancies at different levels—we have a mere 14 judges per one million people in India.
Making land available to businesses remains a complicated process without an effective legal framework; amongst other steps, it involves adequate compensation, resettlement of displaced citizens, and 70% approval from landowners. The union government’s attempt in 2014-15 to amend the Land Acquisition Act that was enacted just the previous year had to be abandoned. It was left to state governments (who have concurrent jurisdiction over land acquisition) to take the calls, and the displacement of small landholders and farm labour continues to be politically challenging for provincial governments. Under these circumstances, the setting up of several announced new large industrial and manufacturing zones, special economic zones and the envisaged coastal economic development areas, (where the numerous economies of agglomeration could be reaped) has hitherto not been feasible.
Making do with modest sized industrial estates is the way forward in India. This should be acceptable to most foreign investors as long as “assembled” or consolidated tracts of lands are made available by state-authorities, along with access roads, public transportation, water and waste treatment, electricity, and digital connectivity. More importantly, arrangements need to be in place for securing time bound regulatory clearances. Gujarat has in recent years successfully courted significant sums of FDI by focusing on these provisions in new industrial areas.
As China has shown, foreign investors prefer the “plug and play” models of constructed industrial plots in estates with such amenities, along with housing facilities for essential staff. Usually, they are ready to pay the full costs for such infrastructure. Though their preference for land and the structures thereon is a long-term lease, they commonly seek options to cut short the lease terms without penalties in the case of insurmountable difficulties in setting up or running the new business. Providing such flexibility and concessions might be warranted since, increasingly, Indian authorities may also impose stricter regulations on account of climate change considerations such as more efficient use of land, water and energy use to minimize greenhouse gases.
India is also in a unique position to attract significant FDI from its huge overseas diaspora—thousands are well placed in their overseas vocations, have sizeable savings, and a variety of entrepreneurial skills. In fact, their remittances home are already considerable. However, these inflows are usually not in the form of equity—which besides augmenting capital-availability, also bring along emerging technologies.
Emulating China in attracting its diaspora’s intellectual capital is also a worthwhile endeavour. Special dispensations may be given for overseas Indians getting short-term jobs at centres of R&D and technology development, with fast-track clearances for their commercial ventures. Incentives can be strengthened for this population by allowing the terms of repatriation of profits and capital to be better than those for other FDI supported ventures.
In the area of critical technologies such as semiconductors (chips), solar cells, storage batteries and electric vehicles, additional exceptions will need to be made. Creating industry-specific common infrastructure at the government’s cost is required. The union and state governments can also consider extending assured offtakes of a part of their final output for limited periods to enable the recovery of investments by the investors.
Stimulating overall private investment in the country must be a priority to attract more FDI. After all, in the period from 2004 to 2011, when FDI inflows into India grew at their fastest, the overall net investment in the country was also rapidly increasing. It had reached the never seen before level of 36% of GDP in 2010-11(since then it has been hovering between 25% and 29%). For want of aggregate national demand, most Indian businesses are yet to embark on their capacity-augmentation exercises despite the lowering of corporate tax rates in 2017 to average global level for both greenfield and existing ventures. Such ground realities raise valid doubts in the minds of overseas investors.
Alongside this, the government must also go along a more expansionary fiscal route for at least a couple of years. This would help create sizeable additional demand and is a prerequisite for the higher investment needed to pull up the economy and get it back on the needed trajectory of 6-8% GDP growth.
With most central banks on a bond buying spree, the world is currently awash with liquidity. Interest rates are near zero globally. The occasional supply chain entangling due to the stymying of the global system reliant on lean production and fast shipping is clearing up. The inflation bedeviling businesses that has primarily been caused by the sudden release of pent-up demand should also soon be a thing of the past as production ramps up and the abnormal demand clears out. With near normalcy fast returning in most big economies, and China no longer the cynosure of the world’s FDI, India’s opportunity to get a bigger slice of the available capital has never been better. To materialize this though, pragmatism and promptness in multiple remedial actions is the need of the hour. Without predisposition or excessive obsession for any particular ideology, India should spring into action. Or else, it would be a saga of another missed opportunity.
Dr Ajay Dua, a progressive economist and a public policy expert, is a former Union Secretary, Ministry of Commerce & Industry.