In one of the biggest ever reforms, the government in 2016 opened up defence, civil aviation, single brand retail and pharma to more foreign investments. But not many are biting the bait yet.
THE ROAD TO HELL, as Samuel Johnson once famously remarked, is paved with good intentions. So is the dream of making India a favourite destination for global manufacturing.
Despite the loud proclamations by the country’s leadership about changing the face of Indian manufacturing through the “Make in India” campaign coupled with measures to improve the ease of doing business and frequent foreign visits by the Prime Minister to lure foreign investment, the impact on the ground has not been spectacular.
Without the requisite infrastructure, skilled manpower, bureaucratic environment or assured market no potential investor is going to risk India. Not even Indians. That is the story fast emerging from the notably unsuccessful “Make in India” campaign.
If there is an assured and growing market and favourable policies, as is the case in a few sectors such as automobiles and cell phones, foreign investors will certainly make in India.
Otherwise China, Malaysia, Mexico and a number of other countries are still a much better bet. No small wonder then that a number of large Indian companies have been investing abroad rather than in India.
What Statistics Tell
According to the statistics, Foreign Direct Investment (FDI) equity inflows into India during the April-September 2016 period was about US $ 21 billion. Not bad but not great either. Especially when compared to US $ 40 billion in 2015-2016 and US $ 31 billion in 2014-2015.
The numbers suggest that FDI inflows during the second term of the UPA government led by Prime Minister Manmohan Singh was patchy at best with just one year (2011-12) registering a decent increase in inflows.
FDI inflows picked up somewhat during the first two years of Prime Minister Narendra Modi’s tenure to a respectable but not spectacular 27-29 per cent per annum.
However, the story in 2015-16 so far is not cheery. The first six months of the current financial year has just seen about US $ 21 billion in FDI equity inflows. This, despite the grand “Make in India” campaign, is definitely disappointing as FDI growth rate this year could be far lower than that of the previous two years.
Statistics also suggest that the bulk of FDI inflows during the past two years have gone into services, the construction industry, information technology and so on. Very little has gone into manufacturing, apart from the computer hardware, automobiles, telecommunications and pharmaceuticals sectors.
The bad news also is that despite a number of measures to prevent the return of hawala funds through countries like Mauritius and Singapore, the bulk (almost 50 per cent) of foreign equity inflows continues to pour in from these two sources.
The Story So Far
Foreign investors from China, United States and Europe show little sign of making a bee line for India.
Unlike in China where large US, Japanese and European corporations set up factories to manufacture goods for their domestic markets as well as for emerging countries’ exports, FDI equity inflows into India have remained modest and confined to a few sectors for which there is a domestic market.
The result has been a virtual stagnation in organised sector industrial growth with joblessness remaining extremely high. Despite talk about India being the bright spot in the slowing global economy, unemployment in India is growing while almost a million Indians are entering the job market every month.
The equity market as reflected in the stock exchange is still fuelled largely by speculation and here too foreign portfolio investors have played opportunist. The lack of long time conviction in the Indian equities market means foreign institutional investors buy and sell in a speculative cycle putting pressures on rupee management and adding to stock market volatility.
For instance, in November this year foreign portfolio investors sold equities worth Rs. 18,909 crore, which amounted to the biggest ever monthly outflow.The last time anything like this had happened was in October 2008 during the global financial crisis. This time, the stock market fell only marginally thanks to massive buys by domestic mutual funds and institutional investors.
Fact is foreign investors are not coming in with their money into India for the long term. They still need to be convinced that India is worth it.
The roadblocks
Despite the government claiming to have removed a number of roadblocks to doing business in India the overall environment is still negative.
India ranks low on the “ease of doing business index”, ranking at number 130 after improving 6 places. The main problem areas include those involved in starting a business, registration, paying taxes and enforcing contracts.
Indian Labour laws continue to be punitive and stacked against managements. This is cited as one of the main deterrents to “Make in India”.
According to Transparency International, India is still considered a very corrupt country in line with Thailand and Brazil. Out of a score of 100 indicating clean government, India scores a measly 38.
The Indian banking system has become unviable due to the colossal level of wilful default by large borrowers; the Indian corporate sector is technically bankrupt. The government’s valiant efforts to fix the problem arising out of huge nonperforming bank assets are not working.
State governments have a plethora of complex local laws and notoriously high levels of corrupt officials. These effectively negate all the positive measures being undertaken at the Central level.
Even as the Centre is trying hard to implement the Goods and Services Tax (GST) or one nation-wide tax on goods and services, states are working behind the scenes to enacts laws and put in place rules, such as entry tax and special permits, to undermine the “one country, one tax” endeavour.
The country is fractured and has been subject to carpet bagging during the last five years of UPA rule. Corrupt and inefficient state governments have vitiated the business environment in the country. Loud bragging by the Central government without fixing the basics has shorn the “Make in India” campaign of all credibility. The road ahead is grim indeed.