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Mainstream, VOL LIII, No 10, February 28, 2015

Modi’s "Make in India"

Sunday 1 March 2015, by Girish Mishra

Before ascending the throne of Delhi, to lure the young voters, Modi had propagated the virtues of FDI (foreign direct investment). He claimed that once he comes to power, there would be a long queue of the foreigners ready to invest in India. Till then the policies of the Nehru-Indira era were preventing them from entering India. Once they start investing in India, new job opportunities would arise and there would be no young unemployed people and they would get enough money to buy flats and modern cars. Happiness would prevail everywhere.

Let us see what foreign direct investment is. Any foreigner who goes to some other country to set up factories to produce goods and invest in the area of services, the motivation is to earn higher profits than in his own country. He sells his goods and services in the host country as well as in the world market to earn profits. Obviously, the host country is not constrained by the indigenous savings but it also gets foreign investments to develop the economy. FDI is different from investments in shares, bonds, etc. because they could be easily sold and money may be transferred somewhere else where the scope for earning higher rates is much brighter. FDI cannot be easily transferred from one country to the other. If we leave aside the cases of mergers and acquisition, in most developing countries, foreign direct investors have to acquire land, provide for water, electricity, road and rail transport, etc., build accommodation for employees and security for workers and managers. Foreign investors have to approach the government and it takes quite a long time to convince it. Thus a great deal of time, known as gestation period, has to be spent between the initiation of the proposal and production of goods.

Foreign investors have to take note of the rate of taxation in the host country. Will it give remissions in taxation for a long period? Will the output to be exported, and machinery and technology to be imported initially get concessions in tariffs? Does the host country have special economic and export promotion zones where labour laws are not operative? Does the government of the host country acquire land and provide it to foreign investors on nominal prices? Is electricity provided to investors at subsidised rates? These steps by the government of a host country lure foreign investors.

In 1991, when Dr Manmohan Singh as the Finance Minister accepted the neoliberal path, he facilitated the entry of foreign investors. A number of changes in laws and government policies were introduced. Yet the maximum limit on FDI ranged from 26 per cent to 49 per cent only, depending on the nature of industries.

On May 30-31, 2002, the World Bank held a conference where Maria Carkovic and Ross Levine presented a paper, entitled “Does Foreign Direct Investment Accelerate Economic Growth?” It pointed out that during the 1980s, the foreign banks curtailed the loans to developing countries. Consequently, they were compelled to reduce the restrictions on FDI and began giving concessions to lure foreign investors. As a result, in the 1990s foreign investors were seen rushing to developing countries. By 1996, emerging market economies received $ 320 billion, which rose to $ 2000 billion by 2000 and by 2002 the share of FDI reached 60 per cent of the total private investment. To quote the two economists, mentioned above, “While the explosion of FDI flows is unmistakable, the growth effects remain unclear.” They go on to add: “The economic rationale for offering social incentives to attract FDI frequently drives from the belief that foreign investment can ease the transfer of technological and business know-how to poorer countries. These transfers may have substantial spill over effects for the entire economy. Thus, foreign investment may boost the productivity of all firms—not just those receiving foreign capital.

“Taken together, firm level subsidies do not lend much support for the view that FDI accelerates overall economic growth.”

Prime Minister Modi is not convinced by these two economists and has raised the slogan “Make in India”, but it seems that Raghuram G. Rajan, the RBI Governor, is not in agreement with him. In December 2014, he delivered the Bharatram Memorial Lecture and what he said there needs to be taken note of. He holds that, despite the recovery of the American economy from great recession, the world economy is still in doldrums. The Euro zone and Japan are not yet out of recession and during the past six months their rates of growth were negative. That is why many developing countries are rethinking on their export-oriented economic growth. In India, we cannot ignore the domestic demand and indigenous market. Obviously, we cannot go very far by relying on the foreign market.

Three weeks before Rajan’s lecture, Martin Wolf wrote a piece in the Financial Times, saying that the global economy had not come out of recession. In this situation, where will the goods manufactured in India be exported? Wolf says there are three sets of explanations: “The first set stresses the post-crisis overhang of private debt and the damage to confidence caused by the sudden disintegration of the financial system. The by-now canonical response consists of cleaning up balance-sheets and forced injection of capital into the banking system, supported by stress tests, to convince the public that the financial system is again creditworthy. To this should be added fiscal and monetary support for demand. In this view, a return to growth should be swift.

“The second set of explanations denies this last proposition. It argues that the pre-crisis demand was unsustainable because it relied on huge accumulations of private public debt—the former associated with bubbles in property prices....

“The third set of explanations points to a slow down in potential growth, due to some combi-nation of demographic changes, slowing rises in productivity and weak investment.”

The Financial Times (December 30, 2014) has carried an article “Modi faces uphill battle in mission to see India rival China” by James Crabtree. It says that Modi’s “goal to turn India into a global manufacturing hub will be difficult to achieve.”

Crabtree says: “As Prime Minister Narendra Modi ponders his New Year’s resolutions, one stands out: redoubling India’s efforts to rival China by turning into a global manufacturing hub. Few goals are as important to his country’s future. But few are likely to be as difficult to achieve.” He then goes to add: “India’s manufacturing frailty is well documented. At just 15 per cent of gross domestic product, the sector is less than half the size of China’s. No poor Asian country has risen to middle-income status with such feeble figures—hence the urgency behind Mr Modi’s ‘make in India’ drive, launched amid hoopla in September.”

It is not very easy to create 120 million jobs by 2030 when we look at clothes and electronic industries where workers are less educated. Till the last year the Finnish company, Nokia, was operating successfully in Chennai and 8000 workers were employed. Its products were exported all over the world but now it has sold its business because some government depart-ments were allegedly harassing it.

The author, a well-known economist, used to teach Economics at Kirorimal College, University of Delhi before his retirement a few years ago. He can be contacted at gmishra@girishmishra.com