\As a possible fall out of the
COVID-19 pandemic crisis, India has the opportunity to attract foreign direct
investment inflows from large companies seeking to diversify their investment
to mitigate risks. It has set up an empowered group of secretaries to engage in
conversation with these companies and provide all possible facilities to them
to ensure ease of setting up business. In addition, some incentive schemes have
been announced in sectors where the government feels India has an advantage
such as mobiles, electronics and medical equipment. However, mere incentives
may not be sufficient to attract these investors. It will require a whole
ecosystem which is facilitative and not overbearing.
China had, over the years, become
the most preferred destination for international companies to set up shop and
supply their products to global markets. The excellent infrastructure,
abundance of cheap and professional labour, ease of doing business facilities,
a strong business ecosystem, low taxes, not-so-strict regulatory compliances
and competitive currency practices are the main reasons for the attraction
towards China. As a consequence, China became the largest recipient of foreign
direct investment (FDI) in Asia.
However, with the outbreak of the
COVID-19 pandemic from Wuhan and the increased concerns, largely emerging from
the United States (US) and countries in Europe, that the virus may have been a
bio-weapon, a large number of multinational companies have begun to entertain
thoughts of diversifying their production sources. In fact, this is not the
first time that such a thought has occurred in the minds of these companies.
There was an indication that South Korean firms were engaged in talks with
Indian companies to relocate some of their production sources to India. The
added concern, which has been very prominently highlighted with China having
locked down its production, export and shipping facilities, is the risk of
facing disruption in the supply chain, with one hiccup in that country. Several
large conglomerates have realised the risk of being so totally dependent for
manufacturing activities on a single country. It is this awareness which has
prompted them to expand the geographic spread of their facilities. This concern
had begun gaining ground in the protracted China-US tariff discussions which
had introduced jitters in the mind of companies which had large facilities in
China.
India offers an attractive option to
these companies. It is believed that nearly 1,000 companies are engaged in the
process of exploring multiple alternative locations and that 300 of these are
in talks with Indian companies. If this is really true, the Indian government
needs to proactively create an environment such that the thought of India as a
supply chain partner becomes attractive to these companies. No doubt, this will
require the creation of world class manufacturing ecosystem, supplemented by
trained and highly-skilled manpower. The ecosystem should encourage innovation
and protect intellectual property. These factors, combined with cheap and
reliable labour, helped China attain a leading position. In the realisation
that mere geo-political considerations will not attract companies to India, the
government seems to have embarked on a major mission to make available all
feasible policy options to attract FDI inflows into the country and help large
companies, presently based in China, to diversify their sources of production
to mitigate their risks.
On 3 June 2020, the Indian
government announced the creation of an empowered group of secretaries, headed
by the cabinet secretary, and a Project Development Cell (PDC) in the
ministries/departments with a view to attracting investments to the country.
Its objectives include bringing synergies and ensuring timely clearances from
different departments and ministries to attract increased investments into
India and provide investment support and facilitation to global investors and
to facilitate investments of top investors in a targeted manner and to usher
policy stability and consistency in the overall investment environment. The
PDCs, located in each economic ministry, have been set up for the development
of investible projects in coordination between the central and state
governments. The PDC will be tasked to conceptualise, strategise, implement and
disseminate details with respect to investible projects.
The PDC is aimed at creating
projects with all approvals, making land available for allocation with the
complete detailed project reports for adoption/investment by investors and to
identify issues that need to be resolved in order to attract and finalise the
investments. The government’s objective, besides making India an
investor-friendly destination, is to ramp up production across product lines
and help to serve big markets in the US, the European Union, China and
elsewhere, thereby making India a large player in the global value chain. The
setting up of the committee comes after the government made certain changes in
its FDI policy which restricts direct investments from China and other
neighbouring countries. The changes were introduced to curb opportunistic
takeovers or acquisition of Indian companies, mainly unlisted. With this
amendment, the government merely proposes to introduce a screening process.
However, a large number of companies such as Paytm, Snapdeal, Ola, Swiggy,
Zomato and Big Basket, which have fairly substantial Chinese investment, have
been concerned about this provision. This concern has to be seen in context of
the fact that more than 234 funding deals have been done with Chinese investor
participation in the period 2014-19.
The efforts of the government to
incentivise domestic and foreign investments in sectors where Indian conditions
appear to have an advantage, such as smart phones, electronics, medical
devises, textiles and synthetic fibers, have been identified. The government
has announced three schemes to boost domestic and foreign investment to create
a manufacturing hub in India for electronics and smart phones. In one of the
largest incentive schemes to boost the production of mobile phones and their components
in India, the government has announced a production linked incentive package of
nearly ₹420 billion (S$8.75 billion) to be disbursed over five years. This
involves an incentive of four to six per cent on incremental sales of goods
manufactured locally for a period of five years. The major beneficiaries of
this scheme among the foreign producers would be companies selling high end
devices such as iPhone producer Apple, Galaxy and Note series by Samsung. Among
the domestic producers would be players like Karbonn, Micromax and Lava.
Due to the minimum price restriction
of US$200 (S$278) of the product for eligibility, companies such as Oppo, Vivo
and maybe even Samsung would not be eligible for the incentive as their
products are priced below US$200 (S$278). This scheme will be operational from
1 August 2020. The scheme has been devised to overcome the disadvantage of
8.5to 11 per cent that the sector manufacturing electronics hardware faces
vis-à-vis other producers in countries such as Vietnam and China. This is
largely due to the inadequacy of infrastructure, domestic supply chain and
logistics, high cost of capital, lack of uninterrupted supply of power and
limitations of design and research and design facilities.
The government has also announced
another scheme – Scheme for Promotion of Manufacturing of Electronic Components
and Semiconductors – which will also be launched on 1 August 2020. This is to
develop a supply chain which is essential for the manufacturing of electronic
products with higher domestic value addition. The scheme will help offset the
disability for domestic manufacturing of electric components and
semi-conductors. The attempt is to strengthen the electronics manufacturing
ecosystem in the country by providing a financial incentive of 25 per cent on
capital expenditure for the identified list of electronic items that comprise
downstream value chain of electronic products. The scheme is applicable to
investments in new units and expansion of capacity or modernization and
diversification of existing units.
Yet another attractive proposition
approved by the government is the Modified Electronic Manufacturing Clusters
(EMC 2.0) Scheme to develop world class infrastructure, along with common
facilities and amenities through the Electronic Manufacturing Clusters, to help
create a hub for mobile and component manufacturing. It is hoped that these
EMCs will help in the growth of the electronic system design and manufacturing
sector, create an ecosystem for the development of entrepreneurs and drive
innovation by attracting investment in the sector and thereby creating
employment.
Additionally, two important factors
to convert the opportunity into an advantage are the easy and early
availability of land and a consistent and flexible policy on labour. Land is a
state subject and states like Karnataka have already put in place policy
amendments which permit corporates to directly negotiate with and purchase land
from farmers. The states have begun to prepare their land inventory and the
central government aggregates these and offers them to potential buyers. Similarly,
amendments to existing labour laws are being proposed to introduce certain
degree of flexibility in hiring of labour. On the whole, the government is
working on strategic implementation of an integrated approach that will
eventually bring about synergies between ministries/departments of the central
and state governments in investment and related incentive policies.
To help in the ease of doing
business, the government is also seeking to reclassify certain offences under
the financial sector laws as civil offences rather than criminal so as to
improve the ease of doing business. It is expected that the reclassification
will decrease the burden on businesses and inspire confidence among investors.
The nature of default will then be evaluated in terms of the action being an
act of omission (inadvertent) or an act of commission (pre-mediated default).
The proposal is to re-look at provisions which are merely procedural in nature
and do not impact public interest or national security. The defaults that are under
consideration of government are bounced cheques which entailed imprisonment up
to two years or taking of public deposits. The government is seeking to
decriminalise four sections of the Reserve Bank of India Act in this regard.
This is a move which will be welcomed by the industry and investors who feel
that, whilst a heavy penalty in terms of monetary fine is in order,
criminalisation is an avoidable dampener to businesses.
Another sector which offers an
excellent opportunity for India is higher education. As part of his election
campaign commitment, US President Donald Trump has banned the entry of citizens
from six Muslim-majority Organisation of Islamic Cooperation-member countries
into the US. The countries are Chad, Libya, Syria, Yemen, Somalia and Iran.
This ban was contested and has been upheld in the US Supreme Court, thus giving
finality to it. Besides the adverse impact it will have on the inflow of
tourists from these countries, it will also indirectly impact the enrollment of
students in American universities. It is estimated that about 22,000 students
from these countries are presently enrolled in the US. India has a fairly
sizeable proportion of foreign students joining its universities and higher
educational institutions. The numbers are growing with students from
Afghanistan, Sudan, Iran and the United Arab Emirates leading the pack. With
the changes introduced in FDI and registrations of educational institutions in
the private sector, there has been an improvement in the overall standards of
education. This indicates the potential that India has to offer as an
alternative educational preference for foreign students by ensuring even better
standards of teaching and other related infrastructure. The government should
develop a strategy to attract overseas students especially as China may be a
less attractive destination for a while. Facilities and the quality of
education in private technical institutions find easy acceptability for jobs
and higher learning in the US, indicating to the potential that this sector
offers.
A step in the direction of an indigenous
industry seeking to substitute Chinese equipment has been taken in the field of
solar equipment. Adani Green Energy, a large Indian private conglomerate, has
won a major tender to set up 8GW of manufacturing linked solar energy projects
with an investment of 45,000 crore (S$9.72 billion). It is learnt that the
group is in negotiation with potential equity and strategic partners for latest
technology solar equipment manufacturing. Presently, Chinese solar equipment
has a 90-per cent share in the Indian market. The new facility will reduce the
dependence on Chinese facilities to negligible levels. To provide an initial
stimulus to such ventures, while the government may not be able to give cash
incentives, assistance could be provided by policy interventions such as
anti-dumping duty or customs duty on imports.
The capacity of the government to
attract investment in the country cannot be determined merely by the schemes,
incentives and other tax related attractions that it can offer. It will
determined by a holistic ecosystem that the government machinery, both in the
centre and the states, will be able to offer so that the ‘ease of doing
business’ is noticeable at the ground level. There has to be a facilitative and
‘hand holding’ approach in the states where these units will be established and
the local bureaucracy should not become a stumbling block. The main issues
involving the local bureaucracy which delay clearances are the approval of
licenses, early land acquisition, power connections, environmental clearances,
bank loan applications and easy registration to employ contract labour.
Facilitation officials need to be mandated to ensure that new investors are
provided all the guidance and assistance to set up their facility in a time
bound manner. The government should put a premium on timeliness for such
activities and fix accountability where any lackadaisical approach is observed.
The Indian government will have to
be cognisant of the fact that there are other countries in the Asian region
seeking to attract companies that are likely to be moving out of China.
Malaysia, the Philippines, Indonesia and Vietnam are equally attractive
destinations and have indeed been able to successfully induce large corporates
to set base there. Hence, it is a comprehensive set of policy options which
will have to be coordinated for synergistic action between the state and
central governments. The Indian government has to contend with a contraction in
the economy as a consequence of which tax collections will decline. The fiscal
policy space available to the government is very limited. It is time to ensure
a consistent and predictable policy environment. Unpredictable and rapidly
changing norms in respect of taxation, trade and investment deter longtime
investors. The high cost of manufacturing and myriad regulatory approvals are a
huge deterrent. The government needs to announce measures which will be
guaranteed for at least 10 years so as to enable corporates to take decisions
in an atmosphere of certainty rather than face an uncertain future.
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