There are many ways to interpret any macro number, but probably foreign direct investment (FDI) numbers can be interpreted in only one way, for what they are. Of course, Cassandras will say that if you include equity investment numbers, FDI will zoom up. Include it in a year when equity markets are down and foreign investors are taking money out of emerging markets, FDI numbers will look extremely bad. Include, mergers and acquisition numbers, again FDI number will bloat. Because of this flexibility of interpretation, FDI numbers have proved to be malleable and ductile. Policymakers often try and paint the picture as per their convenience.
As reported by this paper in its Monday edition, FDI grew at 3 percent to $44.85 billion in financial year 2017-18. While it is growth in absolute terms, a marginal 3 per cent growth at a time when global firms are flush in high liquidity, why is India getting such low numbers is the issue? For a government which has been shouting from the rooftops about how ease of doing business has improved radically and India is attracting large dollops of FDI, it is a huge slap in the face. India remains capital deficit and even the good years when FDI has come in large numbers over the last four years, ecommerce was the magnet and not manufacturing or smokestack. Of course, every kind of FDI is welcome in a capital starved nation like India, but what is most important is that this FDI comes in green field projects in the manufacturing sector. The reason is stark and for all to see, for every dollar coming in manufacturing, it will have a positive impact on the economy. Which is much more than when it comes into the equity market or any other financial instruments. Also FDI which comes in manufacturing is much more stable and creates many more jobs. Tuesday's announcement by VW Group to invest ¤1 billion in manufacturing is like a booster shot for a beleaguered economy.
Despite all existing polices, the flow of FDI in manufacturing has not been there. This is not the case only over the last four years, in fact in the last two decades, as a country we have not been able to attract the required level of FDI in manufacturing. Viewed in the light of the fact that India offers a huge domestic market to companies who set up their plants here, it becomes an even more glaring failure of our policies. The point to note is that till recently there was hardly any cell phone maker in the country. This is despite the fact that India is the second largest market for mobile handsets in the world. A true anachronism.
One of the reason why FDI had been low is the over lapping of roles which central and state governments play with regard to policy on manufacturing. Now while the responsibility of making investment climate conducive to growth is that of the central government, most of the issues like land acquisition et al are now determined by the states. The other bottleneck being lenient labour laws.
So, if a state is not keen to attract investment by making more realistic and practical laws with regard to these two important factors of production than all efforts of the central government will go waste. Whatever the state government might say, the fact is that both land and labour are politically sensitive subjects and they are not going to bring in any radical reforms. It is policymakers at the centre who will have to bring in policies which bypass this issue. By passing the land acquisition law and BJP in opposition agreed to its passage, the move to de-industrialise began there and then. The solution might lie in once again reviewing the special economic zone policy. This too has been flawed and a flop. Last time it was made, companies turned it into an instrument to get into the real estate business. The rules and regulation need to be amended, why have SEZs which are only for exporting. Why not have SEZs which are focused only on domestic markets. Give financial incentives for companies to come and establish their manufacturing facilities in these zones. Yes, it would mean that initially some revenue would be lost, but over a period of time that financial loss would be more than compensated. Let’s just take the example of electronic goods, more than gold imports, it the import of electronic goods which is causing the problems with trade numbers and also on the currency front. If India, were to have a couple of dedicated SEZs for electronics to be only made solely for domestic markets, then surely there are companies which would be keen to come to India and we would not face this problem.
Also, given the fact that with implementation of GST, indirect taxation regime has stabilised in India, policy mavens should use this point to sell India’s manufacturing story as one where a stable taxation regime is in place which can influence decisions of large global corporations. Yes, it would take time for these policies to yield results but it is high time that our policymakers start thinking of how to make India a manufacturing hub. Only then will we be able to become a real employment generator.