Date: 20/12/2022

Relevance: GS-3: Economic Development and Growth; Trade and Investment; Infrastructure.

Key Phrases: International Trade, Global Investment, Policy stability, Tariff and Non-Tariff Barrier, Developing Nations and Advanced Economies, Multinational Companies and Manufacturing Sector.

Context:

• Recently, in an interview, Gita Gopinath highlighted our opportunity to attract global investment, but we must lower trade barriers and promise policy stability if India is to become the world’s next mega factory.

Key Highlights:

• India is rapidly emerging as a preferred country for foreign investments in the manufacturing sector.
• The robust 76 percent year-on-year jump in FDI in the manufacturing sector to $21.34 billion in FY22.
  • The share of foreign investments in manufacturing has steadily inched up and the automobile segment has been a big beneficiary.
• India is a country of 1.4 billion people with a rising middle class. On the face of it, the country presents untapped growth potential.
  • Instead of this, why would companies not want to grow their manufacturing footprint in the fastest-growing economy? Especially when the world’s factory, China, is struggling with serious economic challenges. This is a matter of concern for India.

Concerns related to Trade and Manufacturing:

• Hefty tariffs, archaic labour laws, fragile policy frameworks and regulatory uncertainty compounded unfavourable growth conditions in an unfamiliar territory.
• Another concern is the acquisition of land with clear titles without bribery and conflict.
  • Very often, land and project approvals are in limbo for months.
• Retrospective taxation, rejections of foreign dispute settlements and a revenue-sharing muddle in telecom, for example, sent out awkward signals.
• The regulatory environment is very volatile.
  • This makes it difficult for global players to flourish. For domestic companies, it is different. They are used to the policy landscape and can respond swiftly to changes since the management is local. This is not the case for MNCs.
  • For example, In the past, several major multinational companies (MNCs)—Cairn Energy, Hutchison, Docomo, Lafarge, Carrefour, Daiichi Sankyo, Henkel—have exited the country, citing an unfriendly business environment among other reasons. Between 2014 and November 2021, over 2,700 foreign companies and their subsidiaries have shut shop in India.
• India’s slow adoption of rapidly evolving technology and the lack of skilled labour and innovation are seen as hindrances.
• Global companies are re-allocating investment towards advanced and more profitable markets in comparison to emerging markets like India which are yet to catch up on sophisticated technology.

Steps by Government:

• In recent years, the government has cut taxes for new ventures, offered production-linked incentives for manufacturers, sought to slash red-tape and eased tax remission for exporters.
• Under the recently introduced production linked incentive (PLI) scheme, the government has committed to allocate Rs1.97 lakh crore to 13 sectors, including manufacturing of pharmaceuticals, mobile and electronic components, for five years.
  • “ifs and buts” in the fine print of the scheme are not easy for long-term foreign investors to navigate.
  • For instance, the PLI scheme requires companies to meet a certain turnover threshold over five years to claim incentives.
  • One cannot accurately predict how the industry and economy will be in five years. So foreign players will not take this kind of risk, and India is not the only country where they can invest.
• The Centre’s emphasis on infrastructure development and cost reduction on logistics, however, should work in our favour.
  • It is expected that logistics will reduce in cost from 16% to 9% of GDP by end-2024.

Bright Spot

• There are cracks and structural challenges to address in the manufacturing sector. The global slowdown in economic activity has prolonged the pain for companies, but its long-term growth potential is intact.

Way Forward:

• Policies need to be simple and stable so that long term projections can be made.
• As global-scale manufacturing today tends to span multiple borders, integration with supply chains will require not just minimal duties on all items that could serve as inputs, to keep costs low, but also the avowal that these won’t rise.
• A lower-tariff regime will also push local producers to generally get more competitive.
• As seen elsewhere, the formula of joining a cross-border jigsaw of trade dynamics calls for lower barriers in general, rather than item-wise relief, as state choices can be flawed.
• Let’s not be too picky about firms looking to ‘Make in India’. Give overall openness a chance.

Conclusion:

• Policymakers keen to establish India as a factory for the world. But it is still a steep ambition, and achieving it will need well-rounded policy alignment.

Source: Live Mint

Mains Question:

Q. What are the major concerns related to trade and manufacturing in India? suggest measures to address these issues. (150 Words)