November 30, 2020, Ajay Srivastava in TOI
FDI receipts of more than $250 billion in the last five years prove global firms’ faith in the India story. Now, with crucial reforms in place, what should we do to become a top investment destination? We have to become an excellent place for doing business.
This would mean working on enhancing the investor experience. Not just at the beginning of the project but at each subsequent step. From helping her choose the right support package, identifying the location for production to importing the raw materials, and shipping the products. This would be the best red carpet welcome to an investor. We propose a nine-step framework for doing so.
One, identify sectors for priority treatment. Let us focus on industries where India’s manufacturing and exports are weak. Consider electronics, computers, telecom, precision equipment, factory machinery products. These constitute 70% of global trade, but India’s share is a low 0.7%. Most product groups identified for support under the production-linked incentive (PLI) scheme are part of the list.
Two, recognise sectoral concerns. A sector may generate a large turnover, but net earnings may remain small because of large import dependence. For example, for doing the iPhone’s final stage assembly, China gets just $12, which is less than 2% of its retail price of $700. Assembling an EV battery from imported lithium cells or making mobile phones from imported subassemblies fall in the same low value add category. A better model may be inviting an anchor firm along with component suppliers and do most manufacturing in the country.
Three, invite top global firms to become anchor manufacturers in priority sectors. We know their names. With thousands of manufacturing units in most sectors, India needs a few large anchor firms in each sector. Their use of innovation and technology will result in gains for all firms in the entire sector – the way Suzuki did to India’s automobile sector in the early 1980s. Suzuki’s technology and India’s expertise in casting, forging and fabrication were crucial factors. In less than 20 years, the sector’s productivity, and not just Maruti-Suzuki’s productivity, went up by 250%. Mainly due to competitive pressures set off by Suzuki. Today the automobile sector contributes to half the manufacturing GDP. We need a repeat of the Maruti story for a few other sectors.
Four, develop effective coordination with lead investors. One to one discussion at the senior level thrashes out knotty issues and builds confidence. Both sides may discuss available location options or extra support the investor may need. Nominating an officer to coordinate with government on the firm’s behalf for the entire project cycle is a good idea.
Five, provide ready to manufacture space. Delay in buying land and approvals drives away investors. China and many other countries have hundreds of operation ready industrial zones. Each zone takes necessary permissions for all future units. For example, a chemical zone will take approvals for effluent discharge and quality. The investor will agree to follow these. Once ready, the investor moves in, installs machinery, and starts production in a few weeks/months. Industrial corridors being developed across 32 places in India under the National Master Plan may adopt this model.
Six, ensure quick factory to ship movement. Slow factory to ship movement hinders India from becoming a part of the production supply chain. We can reduce the time taken in transporting goods from factory to port through dedicated freight corridors. Locating industrial zones near the sea is another option. Port and customs procedures must be done in the industrial zone to avoid crowding at the port and ensuring just in time arrivals.
Seven, review the import duty structure. This is also the key to signing happy FTAs. Our 90% of imports by value take place in less than 10% product tariff lines. We must test the impact of lowering of import duty on the production and export ecosystem of remaining products. For example, most electronic products are assemblies of thousands of components manufactured across many countries. Components combine into subassemblies and then into the finished product. A part crosses country borders many times. In such a scenario, even a modest duty on components has a multiplier effect. For this reason, most countries charge no import duty on parts or electronics products.
Eight, ensure predictability, reduce arbitrariness in policy regime. Avoid backdated policy changes. Reduce scope for interpretation in tax laws by use of clear, unambiguous language. For example, both India and Nokia interpreted the royalty provisions of the double tax avoidance treaty in different ways a few years back. When Nokia shut its India operations, annual mobile phone exports from India fell from $2 billion to zero; 10,000+ direct jobs were lost. India and Nokia’s loss was China’s gain.
Nine, set up systems for quick resolution of disputes. Firms enter into contracts with other firms and individuals for the supply of goods and services. In case of dispute, parties approach the court for enforcing the contract. Long delays at the Indian courts compromise India’s attractiveness. Quick improvement is a must for improving investor confidence.
Nurturing an investment is like growing a crop. Smart global firms are the quality seeds that grow in a supportive environment. Returns for such an approach are high. Samsung started small in Vietnam 10 years back but, lured by good experience, expanded its operations to export more than $50 billion of products now. Its success also pulled others. The nine-step framework will enhance
India’s appeal as a credible manufacturing and investment destination.