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Possibility of Attracting Global Investment

Context

Gita Gopinath recently highlighted our opportunity to attract global investment in an interview, but we must lower trade barriers and promise policy stability if India is to become the world’s next megafactory.

Relevance:

GS Paper -3: Economic Development and Growth; Trade and Investment; Infrastructure.

Mains Questions

What are the major trade and manufacturing concerns in India? suggest measures to address these issues. (150 Words)


Key Highlights

  • India is rapidly emerging as a preferred destination for foreign investments in the manufacturing sector.
  • A 76 percent year-on-year increase in manufacturing FDI to $21.34 billion in FY22.
    • Foreign investment in manufacturing has steadily increased, with the automobile sector benefiting greatly.
  • India is a country of 1.4 billion people, with a growing middle class. On the surface, the country appears to have untapped growth potential.
    • Instead, why would businesses not want to expand their manufacturing footprint in the world’s fastest-growing economy? Especially with China, the world’s factory, facing serious economic challenges. This is a source of concern in India.

Concerns about Trade and Manufacturing:

  • High tariffs, antiquated labour laws, shaky policy frameworks, and regulatory uncertainty exacerbated unfavourable growth conditions in an unfamiliar environment.
  • Another issue of concern is acquiring land with clear titles without bribery or conflict.
    • Land and project approvals are frequently held up for months.
  • For example, retroactive taxation, rejections of foreign dispute settlements, and a revenue-sharing snafu in telecommunications all sent out awkward signals.
  • The regulatory landscape is highly volatile.
    • As a result, global players struggle to thrive. It is not the same for domestic businesses. Because the management is local, they are familiar with the policy landscape and can respond quickly to changes. This is not the case for multinational corporations.
    • For example, in the past, several major multinational corporations (MNCs)—Cairn Energy, Hutchison, Docomo, Lafarge, Carrefour, Daiichi Sankyo, and Henkel—have left the country, citing, among other things, an unfriendly business environment. Over 2,700 foreign companies and their subsidiaries have left India between 2014 and November 2021.
  • India’s slow adoption of rapidly evolving technology, as well as a lack of skilled labour and innovation, are viewed as impediments.
  • Global corporations are re-allocating investment to more advanced and profitable markets, rather than emerging markets like India, which are still catching up on sophisticated technology.

Steps Taken by Government

  • In recent years, the government has cut taxes for new ventures, offered production-linked incentives to manufacturers, attempted to reduce red tape, and simplified tax remission for exporters.
  • Under the recently introduced production linked incentive (PLI) scheme, the government has committed to allocating Rs1.97 lakh crore over five years to 13 sectors, including pharmaceutical, mobile, and electronic component manufacturing.
    • The “ifs and buts” in the scheme’s fine print are difficult for long-term foreign investors to navigate.
    • For example, the PLI scheme requires companies to meet a certain turnover threshold over a five-year period in order to qualify for incentives.
    • It is impossible to predict how the industry and economy will be in five years. As a result, foreign investors will not take such a risk, and India is not the only country in which they can invest.
  • The Centre’s emphasis on infrastructure development and cost reduction in logistics, on the other hand, should benefit us.
    • By the end of 2024, logistics costs are expected to fall from 16% to 9% of GDP.
  • There are cracks and structural issues to address in the manufacturing sector. The global economic slowdown has prolonged the pain for businesses, but its long-term growth potential remains intact.

Way Forward

  • Policies must be simple and stable so that long-term projections can be made.
  • Because global-scale manufacturing today often spans multiple borders, integrating with supply chains will necessitate not only the imposition of minimal duties on all items that could serve as inputs in order to keep costs low, but also the assurance that these will not rise.
  • A lower-tariff regime will also encourage local producers to become more competitive in general.
  • As previously stated, the formula for assembling a cross-border jigsaw of trade dynamics calls for lower barriers in general, rather than item-by-item relief, because state choices can be flawed.
  • Let’s not be too picky about firms looking to ‘Make in India’. Allow for some overall openness.

Conclusion

Policymakers are eager to establish India as a global manufacturing powerhouse. However, it remains a lofty goal, and achieving it will necessitate comprehensive policy alignment.


November 2023
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