ISSN 2330-717X

Foreign Investment To Rev Up Domestic Investment Starved Growth In India: A Lesson From China – Analysis

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Contraction of GDP has become key to uproar over ill health of the Indian economy.  It is also viewed a scar on Prime Minister Narendra Modi’s charismatic leadership. Paradoxically, while BJP made a big sweep in the general election in April-May 2019, it tumbled in the state elections in Maharashtra and Haryana, which were held in in October. In Haryana, it had to depend on allies to form the government and in Maharashtra , it opted to sit in opposition. In the ongoing state election in Jharkhand in December 2019  and February 2020, apprehension looms large over BJP’s charismatic leadership.

The major reasons for slow growth in GDP were laggard domestic investment and slump in demand. Domestic investors were shy and  consumers were hesitant to spend. Growth in construction felt the pinch of drying up of black money and sales of automobiles tumbled . 

India reels under a constant pressure of downturn in GDP growth in 2019-20, leveraging a panic for  jobless growth and entering  recession.  Since last year, GDP growth witnessed an  unabated downswing:  from 7.0 percent in July-September 2018 to 4.5 percent in July-September 2019. Paranoia loomed large over the recovery of the growth and the country faced public  anger over the spiraling of  onion prices, blaming it a failure of government policies

Nevertheless, there was some respite from foreign investment. While the investment from private and government sectors plunged, investment from foreign sector made a boom. Since the role of foreign investment is not significant in the total investment, it failed to impart a major compensatory impact on the overall investment in the country. Foreign investment accounted  for one-sixth of overall investment in new projects in 2018-19.

China has been the second biggest recipient of FDI in the world. It is one of the major sources for investment related growth.  Contraction in GDP growth impacted growth in FDI. GDP in China grew by 6.6 percent in 2018- the lowest pace in 18 years. Correspondingly, FDI growth in China shrank to 3 percent growth in 2018 against 7.9 percent growth in 2017. Perturbed by slow growth in FDI flow, China promoted a mega reform in FDI policy.

 Domestic private sector is the core investor in the country. It accounted for 47 per cent of the  total investment in new projects in 2018-19. It declined sharply by 21 percent in between 2014-15 to 2018-19 – from Rs 8,460.9 billion in 2014-15 to Rs. 5,686.8 billion in 2018-19. Government investment ( such as infrastructures and others) slipped drastically from Rs. 11, 825.7 billion in 2014-15 to Rs. 4,411.6 billion in 2018-19, hoping that private sector would have poured more cash in the  sectors, vacated by government. It relied on the success  of Make in India, which would have helped private sector to invest in these sectors, after reaping the benefits of the scheme. Alas, Make in India failed. 

It was only foreign investment which pitched for high growth. It increased  by 147 percent – from Rs. 825.5 billion in 2014-15 to Rs. 2043.1 billion in 2018-19.

This landscape of the investment strategies translates that while  foreign investors continued to repose confidence in Modi’s investment friendly leadership, private sector were reined by suspicion. Even the political row between India and China could not deter Chinese investment, which is a fast growing engine for foreign investment.  Chinese investment spurred by over 136 percent in 2018 over  2017 – from US $ 165.2 million in 2017 to US $ 391.2 million in 2018.

Even during the half of the current year, when GDP was witnessing a  constant slip in growth, it could not  dent the foreign investors’ zeal to invest. During half of 2019 ( January – June) , foreign investment spurred by 25 percent  

This reflects that foreign investors were unnerved by  the contraction in GDP. Global rating agency Standard & Poor viewed the downswing  a cyclic phenomena. FDI Intelligence – a global greenfield investment tracker – said  “ manufacturing FDI is on upward curve”. There was 40 percent growth in manufacturing FDI in India in between 2017 and 2018” 

Against this backdrop, India should prompt major reforms in FDI policies. Recently, some attempts were made to simplify FDI policies in retail trade. But, they were  finite. Given the rising role of foreign investment in the absence of domestic mood for investment ,  India needs major reforms to allure foreign investors. To this end, a lesson from  China  is imperative to instill  FDI charm in the country. 

China decided to adopt four pronged strategies in its new FIL ( Foreign Investment Law). It will be operative from 1st January 2020. It decided to offer national treatment to the foreign investors, equal rights for government procurement, banning the mandatory transfer of technology  and adequate protection to Intellectual Property Rights.

India also opened its door substantially to foreign investors. But, it does not provide national treatment and equal right for government procurement. Both have become essential from the point of view of political sensitiveness in the country due to multi-party dominance and government procurement provides  a big market. Banning FDI in multi-brand retail after the defeat of UPA synchronizes the political sensitiveness of the policy.  In this respect, national treatment augur well for a major security to foreign investors.   

In addition , foreign investment is envisioned a key driver for GVC ( Global Value Chain) manufacturing. This is the current trend of global manufacturing dynamism.

After reduction in corporate tax rates and rationalization of GST, India is at par with ASEAN corporate tax structures. With the engagement in FTA , opportunities opened for GVC manufacturing between India and ASEAN. To this end, the success story of Japanese auto industry , overarching India and ASEAN I,s a case in point .

To produce cheap car, Toyota Motor Company adopted an unique GVC model for manufacturing auto parts. It embraced India and five nations of ASEAN for different parts manufacture , given the competitiveness of each nation. India was selected for manual transmission (large type), Thailand for diesel engine, press parts, axle, Philippines for manual transmission (middle  type), switches, Malaysia for engine computer, Indonesia for gasoline engine and Singapore for sales and logistic.

This signifies India’s manufacturing ability and potential for certain segments of automobiles in the model of GVC manufacturing. However, this is possible only when India also offers similar or more  incentives to the foreign investors. 

If China, even though  being the world’s second biggest recipient of FDI,  envisioned that the time has ripen for major reforms to attract foreign investors, why not India wake up to the signal and inject reforms to infuse foreign investment as an alternative to sagging domestic investment. 

Subrata Majumder

Subrata Majumder

Subrata Majumder is an adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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