India's Union Budget 2021: Rosy ring to growth tale

Dubai - India beat its neighbour handsomely, the FDI growing 13% and 4% in the two economies, respectively.

Reliance Industries Limited, India’s richest man Mukesh Ambani’s conglomerate, powered the inflow of foreign direct investments to the country in 2020 at $57b and only second to China’s $163b. India’s bountiful foreign reserves of $585.33b, as on January 22, may spur FM Sitharaman to unleash animal spirits in the FDI sector

A recent report, ‘Investment Trends Monitor’, by the United Nations Conference on Trade and Development, was a cause for much glee in the Indian establishment, and justifiably so. The January 24 report showed that India and China were the only two out of the top 2019 recipient economies that had a positive inflow of foreign direct investment (FDI) last year.

India beat its neighbour handsomely, the FDI growing 13% and 4% in the two economies, respectively.

However, in absolute terms, India’s $57 billion was just a little over one-third of China’s $163b.

The joy in the Indian camp had more than one reason behind it. It came in a year when the novel coronavirus disease (Covid-19) pandemic has ravaged economies and even led to net outflows from countries like the United Kingdom (UK), the Netherlands and Switzerland. Although in some of those cases, the factors had nothing to do with the investment climate in those regions.

The report has given data points to India’s Finance Minister (FM) Nirmala Sitharaman to savour, coming as it did a few days before she presents the Union Budget for the country’s next financial year, which is from April 1 to March 31, 2022, on February 1.

It is a little short of 30 years ago when the then FM Yashwant Sinha had to sign on in May 1991 to allow pawning of gold to secure some foreign exchange for the country that was on the verge of default. By the time, Dr Manmohan Singh took over two months later, the country had foreign exchange reserves to cover just about three weeks of import. The rest is history and India has never defaulted on its sovereign loan commitments.

As per data provided by the country’s central bank, the Reserve Bank of India (RBI), India’s total foreign exchange reserves as on January 22, 2021 year stood at $585.33b, a problem of plenty and a good one to have.

From debating between FDI in potato chips and silicon chips, India has come a long way.

But be that as it may, the need for FDI in key areas of the economy is still to be addressed. It’s a challenge the Narendra Modi-led government continues to grapple with.

Sitharaman will have to confront that challenge one more time in her latest budget.

Critics have mostly credited Jio Platforms Ltd, a mobile-to-digital content outlet of Mukesh Ambani, the world’s 13th richest person as per Bloomberg Billionaire Index, for being the key reason behind the giant FDI inflows into India in 2020. Reliance Industries Limited’s (RIL) subsidiaries attracted $20.6b FDI from the likes of Google and Facebook, more than a third of all the foreign funds that came to India last calendar year.

The expectation is obviously for more and the government seems to be responding. It launched the Production-linked Incentives (PLI) scheme in 2020 to incentivise Indian and global companies to make products not just for domestic consumption but also overseas markets. Under the scheme which comes under the umbrella of the government’s ‘AtmaNirbhar Bharat Abiyaan’ (self-reliant India programme), tax incentives are extended for five years and are directly linked to the quantum of production and exports being executed by the manufacturer in the country.

The response from the foreign companies has been robust. It includes global giants like Apple and Samsung. Apple, the world’s most valued company at $2 trillion, along with its contract manufacturers such as Pegatron, Foxconn, Rising Star and Wistron, is expanding its capacity in India. Various variants of iPhone handsets are being made in India. Samsung and Apple together account for nearly 60% of global revenue for mobile smartphones.

The government response to exploiting the opportunity thrown up by the United States (US)-China trade war, a key highlight of the term of the previous US administration under Donald Trump, might have been slow but once begun, the approach has gathered momentum.

What began as a scheme for making mobiles in the country — the country was a big importer of them from China — the PLI scheme soon expanded to now cover 13 sectors in manufacturing. These include medical devices, advanced battery cells, electronic and technology products, automobiles and auto components, pharmaceuticals, speciality steel, air conditioners and light-emitting diodes (LEDs), solar cells and modules.

Last October, the government also revamped its FDI policy. It threw more sectors open to FDI and also brought more under automatic route. Now, fewer government approval is needed for those investments.

The country accepts 100% FDI in most sectors of the economy. No FDI is allowed in nuclear, tobacco, gambling, betting, casinos, chit funds, and some railway operations. In areas like defence manufacturing, which till not too far ago were close to FDI, rules have been liberalised and sector-specific limits introduced to welcome foreign money with some oversight to take care of security considerations.

Multi-brand retail, a hot potato in the surcharged social and political landscape in India, is still restricted. Up to 51% FDI is allowed in the sector. No wonder, retail giants like US-based Walmart and Germany’s Metro Cash & Carry mostly operate business-to-business (B2B) wholesale operations in India. France’s Carrefour packed its bags and left the country in 2014.

Sectors that have attracted the most FDI in the country have been mobile services, fintech and e-commerce. It shows a tight embrace of Modi’s ‘Digital India’ campaign that he launched in 2015, a year after he first became the Prime Minister (PM).

It is difficult to execute politically and socially sensitive reforms in India. It is unlikely FDI rules for multi brand retail will be relaxed any time soon. Small traders and shopkeepers, the class most affected by modern multi-brand retail, form a key voting constituency of the ruling Bharatiya Janata Party (BJP).

While laws may still be keeping big investment in some sectors away, the government has tried to fix other broader teething issues of land and labour. It is giving companies more flexibility to hire and fire workers. While the central government grapples with reforming those laws, states in India too are taking their own initiative in attracting capital. Long before the federal government relaxed labour laws, India’s desert state, Rajasthan, had implemented it.

Other states such as Madhya Pradesh (MP) and Uttar Pradesh (UP) have also amended their laws to attract capital.

A big sore point for foreign investors, including those committing long-term money to India, has been the high-handed nature of taxmen in the country even as the PM and his colleagues make frequent pitches for foreign exchange. Implementation of rules on taxation can be arbitrary and open to interpretation of the local inspectors. This badly hurts sentiment and only adds to India’s business unfriendly image.