Need Major Structural Changes for flurry of FDIs

by August 30, 2019 0 comments

Need Major Structural Changes for flurry of FDIs
It seems unlikely that the Cabinet’s decisions will lead to a flurry of FDIs until major structural changes are put in place

We are told constantly about how India might become the ultimate beneficiary of the trade war between the US and China. American companies and their suppliers will then move their manufacturing hubs to India as they shift out of China. In reality, many American companies had moved out even before Donald Trump’s twitter diktat to them. But all of them did not relocate their bases to India; some moved to Vietnam and more competitively-priced countries in the region while the others simply went back to America. Despite fancy marketing campaigns thought up by bureaucrats, more at home at a global advertising agency than the administrative service, Make In India has been a damp squib. Although the former Chief Economic Advisor wrote about how Indian industry must export, the fact is that India is still primarily a domestic consumption-driven economy and foreign investment here has been intended to cater to the home market. Other than a few notable exceptions, such as the Renault-Nissan factory outside Chennai, there have been few export oriented foreign investments made in India.

So can the Cabinet’s decisions to ease Foreign Direct Investment (FDI) rules in certain sectors really promote funding? prima facie, it appears that most of the announcements are more fluff than substance. In fact, the 26 per cent foreign investment limit in digital media streaming and uploading might even be a restriction rather than the benevolence that the government makes it out to be. However, something did need to be done to rein in digital media in India but this may not have been the way to do it. Foreign investors have been paranoid ever since the UPA Government announced retrospective taxation on deals. This rightly spooked several investors and the litigatious nature of the tax department made matters worse. While many investors make all the right noises, India’s policy flip flops and reluctance to change poor measures because of a fear of being chastised or even jailed later have made doing business in India for foreign firms almost impossible. The companies that invest in India are usually those who have pre-existing investments or others that have little choice. We are also reminded about the huge market opportunity that India presents but our core consuming economy is driven by a very small sliver of society and little has been done to encourage more consumption or even grow that piece of the pie. India’s much ballyhooed 300 million middle-class is a myth, as is the demographic dividend it is claimed that India will have until some concrete and proper measures are taken to promote investments. That will require more than a public relations spin and tough decisions, including foregoing potential revenues today for a chance at growth tomorrow. Using the funds from the Reserve Bank of India wisely will be a start as will taking some genuinely tough decisions. Besides, studies have shown while FDIs may help raise output, labour productivity and export in areas where they have come in, they have not been able to pull up the sectoral levels collectively. In fact, it would make more sense to open up export-oriented sectors so that a higher growth of the economy is possible. As for 100 per cent FDI in coal mines, private mining companies cannot plunder the earth as India is unlikely to open up more mines, except ensuring better practices. Reality bites.

Courtesy: The Pioneer

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