INTRODUCTION
The New Economic Strategy in 1991 led to increased competition by multinational companies, posing a serious threat to local Indian businesses, and raising issues of sustainability in the economic reforms introduced and its effects. These issues are particularly relevant today, as the COVID-19 pandemic has adversely affected global markets, disrupted manufacturing and global value chains, with the most vulnerable being companies heavily reliant on import of materials. In these trying times, India, like most other countries, has turned inward and is reliant on local production of essential goods and commodities. Due to China’s perceived lack of transparency in managing the pandemic, many foreign companies are now looking to diversify the risk to their supply chain by moving out of China, and India offers them the best alternative.[1]
In the wake of these circumstances, the Prime Minister of India, Narendra Modi, in his national address on May 12, 2020 preached ‘self-reliance’ and called upon Indians to become ‘vocal for local’. He stated that ‘local’ has been supportive during the pandemic and local suppliers have met the country’s demands in this hour of crisis. While many voiced concerns over the fate of foreign or multinational corporations, the Government of India issued a clarification stating that ‘local’ would not only mean products manufactured by Indian companies, but includes those manufactured by multinational companies in India,[2] meaning that the Foreign Direct Investment (FDI) Policy will govern the ‘vocal for local’ campaign.
AN INSIGHT INTO THE POST-COVID FDI POLICIES
Several sectors still heavily rely on imports from other countries. For example, a study has shown that import of electronic components in the electronics industry has been growing regularly.[3] In 2019, India’s total import in the electrical and electronic component category stood at a whopping $50.85 Billion, primarily from China and the U.S.A.[4] This reliance on imports had severely affected local suppliers and undermined local manufacturing. Therefore, now that companies are looking to shift their manufacturing base from China, India would need to make more robust changes to its FDI Policy which would lead to development of the country and provide opportunities to local manufacturers.
Amidst the pandemic, India had made some substantial changes to the FDI Policy to promote the manufacturing sector. The Finance Minister on 16th May announced that the FDI limit in defence manufacturing sector will be raised from the current 49% to 74%, under automatic route, as a huge incentive to foreign companies.[5] India has been one of the world’s largest arms importers and domestically produces only 45% to 50% of defence products[6] resulting in massive defence import bills. To reduce imports and provide employment opportunities, the government will notify a list of weapons to be banned for import which will be increased every year. Further, the Government also announced a separate budget provision for domestic capital procurement, promoting reliance on Indian manufacturers, where the spare parts are to be manufactured domestically as well. This monumental and much-welcomed change reflects the intention behind the ‘vocal for local’ campaign which is not protectionist, but aimed at increasing FDI to transform India into a manufacturing hub.
Another major amendment, which took effect from April 22, 2020, made prior governmental approval mandatory for foreign investments from countries that share land borders with India.[7] This move came right after news of the acquisition of 1% shareholding in the Housing Development Financial Corporation by People’s Bank of China. There were fears that due to the decrease in valuation of Indian companies during the pandemic, they would be vulnerable to acquisition at bargain prices. The earlier Consolidated FDI Policy, 2017, already regulated investments from Pakistan and Bangladesh, by allowing them to invest only after governmental approval and also specifically prohibited investments from Pakistan in sectors like defence, space & atomic energy. Thus, the intention behind this new amendment is to regulate investments from China, placing them under government scrutiny to prevent predatory behaviour and opportunist takeovers. Like other countries that have incentivised their companies to move manufacturing bases outside China, India has also sought to do the same with this amendment. Even in the pre-pandemic times, the Department for Promotion of Industry and Internal Trade Secretary had stated that the government is focusing on global companies which want to shift their bases from China, and are looking at India as a second investment destination.[8]
However, these amendments are only the first step. If the government intends to see the “vocal for local” vision through, and promote manufacturing, substantial changes in the FDI Policy will need to be made post-COVID. With liberalisation of the defence sector, opening up of other sectors involved in manufacturing activities where 100% FDI is currently not permitted under automatic route, and easing regulatory procedures for FDI, are some changes that could be predicted.
To achieve the objective of making India a manufacturing hub, an important need is to strengthen domestic content requirements or compulsory local sourcing, by requiring a percentage of the goods to be domestically manufactured or sourced. Currently, a mandatory 30% of local sourcing is required in single brand retail sector (comprising businesses which sell goods directly to consumers under the same brand), for companies which have FDI more than 51%, to be met as an average during the first five years. After the first five years, such norms will apply on an annual basis. Last year, the Government amended the FDI policy to allow single brand retailers to first sell their products online without setting up a physical store in India, giving them an opportunity to test the Indian market. This is an important step in encouraging foreign investment in India, and when these retailers set up physical stores in India, imposing domestic sourcing requirements will then serve the purpose of encouraging manufacturing as well. Additionally, the Ministry of Power recently increased the minimum domestic content requirement for electrical equipment used in the distribution sector by 5 per cent.[9] To promote indigenous procurement, the government would perhaps be more vigilant with respect to domestic sourcing norms and can increase the percentage gradually, but must also provide key incentives and relax regulatory processes to facilitate the entry of foreign investors, like allowing the single brand retail sector to test the market before requiring domestic sourcing. Further, if domestic sourcing requirements are to be bolstered, foreign companies are likely to be granted a longer adjustment or transition period to comply with the conditions. This will be sustainable and fruitful in the long term.
According to an Index published by The Organisation for Economic Co-operation and Development, India was ranked 9th in terms of having the most restrictive FDI regime out of 69 countries. This demonstrates the need for fundamental reforms in the FDI Policy along with incentive schemes like the recent Production-linked Incentive Scheme launched to boost electronics manufacturing.[10] The scheme offers incentives between 4-6% on sale of goods manufactured in India, and further relaxes licensing and ease of doing business. The post-COVID FDI Policy have the potential of opening the doors for investment in India for the manufacture of electronics, medical devices, pharmaceutical drugs, textiles, and automobiles, whose potential was previously untapped. The opportunity is particularly greater for all those industries where China has been a major exporter such as in electronics and textiles. India presents an attractive alternative in these industries post-COVID.
FDI stimulates the growth of exports and enables the country to reach global markets that would not have been utilised otherwise. FDI further facilitates economic growth of developing nations especially, by increasing competition and positively impacting efficiency of production processes. Therefore, apart from attracting inward investment, the Prime Minister’s appeal for going local has a broader goal of strengthening local products to ultimately become global brands, thereby increasing exports and pushing outward FDI. India should become a hub for global export of products, and not be restricted to domestic consumption only. This can be achieved by imposing minimum export obligations which mandate that a specified part of the produce must mandatorily be exported within a prescribed time period.
Conclusion
The ‘vocal for local’ campaign and the amendments to the FDI policy indicate that the Government’s intention is not to shut down India’s borders, but rather to promote indigenous manufacturing through foreign investment. Creating an investment-friendly environment is imperative for the growth of local industries, generating employment and ultimately increasing our reliance on local entities rather than on imports. Foreign investment does not just provide capital, but also knowledge, skills, and technology, which can develop local products. This will lead to an increase in India’s share in the global value chains and strengthen the role played by Micro, Small and Medium Enterprises in the country’s economy.
However, a review of other policies with respect to availability of labour, infrastructure, government assistance for procuring land and in setting up manufacturing units need to be integrated with the changes to the FDI policy to truly achieve the vision of this campaign in the post-COVID world. On the other hand, easing out FDI norms and attracting investment without any regulation would lead the country back to square one, with multinationals replacing domestic entities, thus pushing the latter out of business. The relaxations in the FDI policy must be restricted to manufacturing sectors, with an emphasis on local sourcing and subsequently, export obligation. This would pave the way for reaping the benefits of FDI and cross-border trade as well. If these measures are taken, the ‘vocal for local’ campaign would have a positive impact on the existing FDI regime and the country as a whole.
This article has been authored by Diyaa Kuntal Desai, Final-year student, Alliance School of Law.
[1] Pravakar Sahoo, A post-Covid business opportunity, The Indian Express May 14, 2020.
[2] PTI, Anything Made in India, Including by MNCs, is Local for us: BJP, The Indian Express May 14, 2020.
[3] Electricals & Electronics Manufaturing In India, NEC Technologies India Private Limited https://in.nec.com/en_IN/pdf/ElectricalsandElectronicsManufacturinginIndia2018.pdf.
[4] Trading Economics, India Imports 1957-2020 Data, https://tradingeconomics.com/india/imports-by-category.
[5] Press Release, Press Information Bureau, May 16, 2020 https://pib.gov.in/PressReleseDetail.aspx?PRID=1624536 (Last visited on July 22, 2020).
[6] PTI, DRDO chief urges for indigenous defence production, The Economic Times September 28, 2019.
[7] Press Note No. 3, Department for Promotion of Industry and Internal Trade, April 17, 2020 https://dipp.gov.in/sites/default/files/pn3_2020.pdf (Last visited on July 22, 2020).
[8] PTI, India hopes to continue FDI growth story in 2020, The Economic Times, December 31, 2019.
[9] Ministry of Power, Public Procurement to provide for Purchase Preference in respect of Transmission Power Sector, Notification No. 11/05/2018 (Notified on 17th March, 2020).
[10] OECD (2020), FDI restrictiveness (indicator) https://data.oecd.org/fdi/fdi-restrictiveness.htm (Last visited on August 8, 2020).
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