By Subrata Majumder
In a recent policy liberalization, the government has done away with the FIPB route for approval of major foreign direct investment. This is a major policy shift to woo the foreign investment, besides opening doors big way under Make in India campaign. But, there are more such challenges to stimulate the domestic investors.
As a result, foreign investment soared in the country, leaving far behind the growth in investment by domestic investors. During three year period of Modi government, foreign investment surged by 40.5 per cent. India received a record of US $ 61 billion FDI (including reinvestment earning) in 2016-17. India retained its global top position in receiving FDI in greenfield investment. Against this, domestic investment sullied. Domestic investment increased marginally by 6.5 percent during the three years period.
The efficacy of Make in India is questioned whether it was to woo the foreign investors only. Or, did the gushing flow of foreign investment act as disincentive to the domestic investment? Will the country return to foreign dominated growth path with more participation of foreign investment?
The fact of the matter is that Make in India campaign did not unravel the challenges to stimulate the domestic investors. None of its attempts comprised of any such reforms, which could stimulate the domestic investment. It has become more of a catchphrase in the government corridors and boardrooms of Indian corporates. Unlike reforms in 1991, whose main aim was to open the door to the private sectors, Make in India failed to deliver any new initiative to the domestic investors.
This resulted in a slow pace of growth in employment opportunities. Unemployment was not abated. Even though, according to the National Sample Survey, India’s unemployment rate reels under 5 and 8 per cent, the growth in employment in manufacturing sector is stuck due to low penetration of domestic investors. Over 83 percent of workers in India were self-employed, casual and contract workers, according to NITI Aayog report.
The reason for foreign investment not responding to reduce unemployment was that foreign investments were made in the organized sectors. The entrepreneurs chose to stay from labour intensive industries and opt for highly capital or skilled- labour-intensive technology oriented industries.
Fiscal incentives and easy monetary policy are the core demand of domestic investors. Make in India is a four pronged strategy – focusing on New Process, New Infrastructure, New sectors and New mindset. But, none of these strategies served the core demand of domestic investors. For example, high rate of interest continued to be a great burden for the domestic investors. In contrast, foreign investors have an edge with several options for easy money from their parent companies and international banks. Few were to take up the gradual phasing out of higher corporate tax from 30 percent to 25 percent over a period of five years.
Take the case of China. Tax incentive has been the primary tool to attract investment in China. In the wake of China losing its investment attraction due to appreciation of Chinese currency yuan, China granted special tax benefits to its investors. It is known as “Super” tax incentive to qualified equity investors for eligible private companies
In 1991, Dr. Manmohan Singh, the then Finance Minster under Narasimha Rao Prime-Ministership, announced bold measures of economic reforms to open the economy. License Raj was abolished. Procedures were simplified. More sectors were opened for private investment. Taxes and duties were rationalized.
Besides opening the doors big way to the foreign investors under Make in India, global financial crisis and breakdown of trade blocks turned benign for foreign investment in India. The export based economies lost the sheen for foreign investment. China is a case in point. China lost its high attraction for foreign investment due to appreciation of Chinese currency yuan. China’s economic growth plunged from double digit growth to less than 7 per cent within three years, lower than India’s. China’s fall in growth and bubble burst had cascading impact on the investment potentials in emerging economies, of East Asia and South East Asian countries.
Given the large domestic demand and sound financial stability, India emerged a bright spot for the foreign investors. The charm to invest in India was further accelerated by business friendly Narendra Modi’s charisma and his Make in India campaign. Under the campaign, several crucial areas were opened to the foreign investors. Ease of doing business perked up with e-governance.
Given this dichotomy between investment by foreign and domestic investors, which failed to create expected employment opportunities, the government has been advised to resort to increase investment in coastal areas to develop the export base industries, with an eye on labour intensive industries. In a major policy move to focus on employment opportunities in the coastal areas, NITI Aayog proposed to set up Coastal Employment Zone (CEZs), replicating Chinese model of SEZ in Three Year Action Agenda (TYAG).
Hitherto, the focuses on employment opportunities were made within the mainland of the country. Big potential exists for development of export based industries in the coastal areas. CEZ can provide a new lease of life to the absorption of working force in the coastal areas.
NITI Aayog proposed incentives on the threshold of employment. It proposed five year corporate tax holiday to firms employing 10,000 workers within three years of tax holiday. Alternatively, zero-rate GST for three years for creating 10,000 jobs and six years for creating 20,000 jobs.
It is hoped that the employment linked investment incentive will gear up the domestic investors’ mindset to invest in the coastal areas and increase employment opportunities. (IPA Service)