China with Indian characteristics
In several addresses to foreign investors this year, Prime Minister Narendra Modi has sought to position India as an alternative investment destination to its own particular Great Satan, China. This is the best time to invest in India, he told them.
Foreign investors appear to have responded with alacrity. Mr Modi said India has attracted $20 billion worth of foreign investment between April and July this year. This is remarkable by any standards. In a year when the global economy has contracted sharply owing to the pandemic — India more than any other emerging market — this is no less than eyebrow-raising. That it accounts for about 27 per cent of FY20’S full-year figure of $73.5 billion is certainly astonishing.
That latter figure was celebrated by the government because it represented a significant 18 per cent jump over 2018-19. The commerce ministry is yet to release first quarter (foreign direct investment) FDI numbers for FY21, so the veracity of the latest statistics is yet to be established. Taking them at face value, it is probable that the April-july numbers have been bulked up by the extraordinary $15-odd billion that Reliance Industries has attracted to its telecom and entertainment subsidiary Jio Platforms.
If that is the case, the latest FDI surge cannot be considered, strictly, a global vote of confidence in India. It reflects instead the global investment community’s understanding of Reliance Industries’ powerful position within the Indian economic and business universe.
Given domestic corporations’ manifest reluctance to invest in any “India story” for some years now —and despite frequent exhortations from ministers — FDI has become something of a badge of honour for the ruling regime. Against the welter of criticism at home and internationally of its polarising majoritarian style of governance and quirky management of the economy, FDI is regarded as a non-ideological endorsement of the ruling regime. This may be a valid assumption up to a point, since global capital is essentially amoral in nature. But it is also true that until last year, FDI, too, grew at an anaemic pace. After touching highs of 25 and 23 per cent in FY15 and FY16, when the “CEO” prime minister was addressing summits and launching serial signature-label investment programmes (Make in India, Start-up India etc, etc), FDI growth dwindled to eight, one and two per cent in FYS 17, 18 and 19 respectively as the realities of Mr Modi’s economic programme (demonetisation, an advanced GST deadline, progressive bans on cow slaughter) sank in.
The commerce minister has taken great pride in the 13 per cent surge in FDI in FY20 but this, again, has been skewed by investments by Amazon in its Indian subsidiary and by the venture capital/private equity funding for start-ups — services, IT and telecom account for over a third of inflows.
This trend reflects faith in Indian entrepreneurship (specifically the start-up universe) and an understanding of the buying power of the Indian middle class (Amazon and Walmart). But that sentiment is quite distinct from having faith in India. Let’s face it: The kind of FDI India has always wanted are the mega-manufacturing greenfield enterprises that create millions of jobs and turn the country into an economic powerhouse in short order. Basically, then, the country has long aspired to be China with Indian characteristics. That quality of business confidence in India is hard to come by — irritatingly, multinationals unquestioningly vested their faith in “Socialism with Chinese characteristics” over two decades ago and rarely had cause to waver. But “Indian characteristics” are way too quirky for investors’ comfort, as Toyota’s complaints about a high tax regime highlighted this week. Toyota has been in India since 1997 and has rolled back an expansion plan on account of the heavy levies on what policymakers see as “luxury cars”. The same problem encouraged General Motors to exit India in 2017, and for Ford to move its assets into a joint venture with Mahindra & Mahindra (another way of exiting) after two decades of struggles to sell cars in India.
That foreign direct investors are willing to put their faith in select Indian entrepreneurs but less so in its governments reflects the gap between reality and potential. The age-old structural constraints on access to land, labour and capital for doing business in India are well established but shifting policy environments compound those problems — from retrospective taxation to non-level playing fields in ecommerce and telecom to rising tariff barriers. Only entrepreneurship with Indian characteristics have the ability to deal with these policy idiosyncrasies, and that is what foreign investors are increasingly betting on.