JAIPUR – India remains a “challenging place” to do business despite actively courting foreign investment, according to a recently released report by the US State Department.
That perception is hurting the potential for India to benefit from ongoing US economic “decoupling” from China, where many multinational corporations have sought to move their factories to alternative Asian nations including most prominently Vietnam.
The report, titled 2021 Investment Climate Statements: India, says “new protectionist measures, including increased tariffs, procurement rules that limit competitive choices, sanitary and phytosanitary measures not based on science and Indian-specific standards not aligned with international standards, effectively closed off producers from global supply chains and restricted the expansion in bilateral trade.”
It added that the US government continued to urge the Indian government to foster an attractive and reliable investment climate by reducing barriers and minimizing bureaucratic hurdles for businesses. While the report was critical of many factors relating to foreign investment in India, there was also a sprinkling of praise.
For instance, the report approved of the Indian government’s efforts to undertake what it described as ambitious structural reforms in the wake of the Covid-19 pandemic, including new labor codes and landmark agricultural sector reforms.
These reforms, it said, should help attract new private and foreign direct investment (FDI). The report also mentioned positively the specific steps taken to reduce the government’s role in the economy, including a privatization program to raise US$2.4 billion announced in February 2021.
Another area mentioned concerned the liberalization of the insurance sector, where the FDI limit was recently raised to 74% from 49%. However, the report added that more needed to be done, including reform of a requirement that the majority of the boards of directors and management personnel must be Indian nationals.
Some Indian economists were not happy with the report. Professor Arun Kumar, the Malcolm Adiseshiah Chair Professor at the Institute of Social Sciences and a retired professor of economics at the Jawaharlal Nehru University (JNU), said: “The report focuses on the US interests, as may be expected from a country report, but it also needed to take into account the constraints of policymaking in India.”
According to Kumar, the report lacked analytical depth as it did not present the implications of current policies for overall investment in India.
He notes that before Covid-19 lockdowns caused the collapse of India’s economy, trouble had already been brewing, seen in slowing growth for eight quarters due to a slowdown in demand, growing inequalities, a fall in investment rates and other factors.
“Foreign investment is not a solution to these problems,” he said.
Kumar was critical of a particular passage in the US State Department report, which said: “In response to the economic challenges created by Covid-19 and the resulting national lockdown, the Government of India enacted extensive social welfare and economic stimulus programs and increased spending on infrastructure and public health.
“The government also adopted production-linked incentives to promote manufacturing in pharmaceuticals, automobiles, textiles, electronics, and other sectors. These measures helped India recover from an approximately 8% fall in GDP between April 2020 and March 2021, with positive growth returning by January 2021.”
The professor countered that Prime Minister Narendra Modi’s government’s economic policies were not designed to stimulate enough demand, which was badly needed given the large number of people who lost their incomes and jobs during the lockdowns.
All of these macroeconomic factors were essential to understanding the broad investment climate in India, he added.
Rajesh Kothari, a former vice-chancellor at the ICFAI University Jaipur, said India has been growing satisfactorily since enduring a second wave of Covid-19 that made the country a pandemic epicenter in April and May.
“Macro data suggests that the country has sustained an impressive growth rate and the government is bent upon providing a conducive economic environment through its various policy announcements – banking, insurance, aviation, defense, infrastructure, etc – sending positive signals on FDI that India is ready to welcome,” he said.
He added that India should have been a preferred investment destination for multinational corporations and transnationals because of the “dubious” role of China in the Covid-19 pandemic, reference to theories the pandemic started in Wuhan, China. But India had missed that boat, he said.
Big US and other companies that have decided to leave China for various reasons have still largely eschewed India because of bureaucratic delays and slow regulatory approvals, some imposed in the name of protecting indigenous industries.
“Inadequate supply of competent manpower for better productivity and efficiency despite commissioning of programs like ‘Skill India’ has been another reason behind India failing to attract industries from overseas,” Kothari said, referring to a government-run human resource development program.
But Kothari and others still see a role for protecting local industry from foreign competition, a sentiment that has deepened after waves of cheap Chinese goods have put many local producers out of business in recent years.
“It is right that India must continue to protect its industry, especially MSMEs (micro small and medium enterprises) because of mass employment created by these economic units… The country should continue to protect indigenous industry, rural industry and should make the rest of the sectors open for MNCs, especially in infrastructure, technology-driven and high-tech industry.”
K K Gaur, a retired professor in economics from a private university, says bureaucratic hurdles inhibit both local and foreign investment.
“Be it foreign or Indian investors, it’s a fact that the government of India needs to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses,” Gaur said. “Bureaucratic hurdles are equally challenging for local startups or entrepreneurs locally.”
However, he added that things had changed somewhat since the last wave of Covid-19 – with the Indian government indicating that local entrepreneurs, businesses, industries and traders should be given priority.
Gaur said it had become mandatory to focus on all local economic activities, irrespective of the size and scale, and to create robust local markets for local goods.
Foreign investment is important, he added, but the concept of “Made in India”, “Make Local, Go Global,” holds equal relevance, especially in the post-pandemic era.
“To save the local economy, traders and industries, the new protectionist measures hold high importance presently. India is [one of] the biggest consumer markets internationally, so local businesses have the right to explore it by any means,” Gaur added.