For A Self-Reliant India, Harness Export-Oriented FDI

A key focus of these policies is the revival of manufacturing sectors through high import tariffs, disguised trade barriers, liberal investment policies, subsidies, and fostering an enabling business environment.

The Self-Reliant India initiative is a flagship programme that focuses on improving the capacity, capabilities and competence of the manufacturing sector, to make the country a centre of global manufacturing.

More specifically, there are four areas of the Self-Reliant India initiative: Manufacturing growth; job creation; promoting FDI; and skill development. In the recently announced Budget, Finance Minister Nirmala Sitharaman underlined the importance of promoting foreign direct investment (FDI) by revamping existing bilateral investment treaties (BITs) to make India an attractive destination for foreign investment.

The policy decision to attract FDI is indeed an important one, although it took longer than expected to arrive. 

The precipitous fall in FDI inflows in the country has garnered considerable traction in the policy sphere. A decrease in FDI can be seen both in terms of absolute value, and share of the country’s gross domestic product (GDP).

According to the Department of Commerce and Industry, FDI has fallen from US$ 82 billion in 2020-21 to US$ 71.28 billion in 2023-24, a decline of 13 per cent. FDI data up to September 2024 demonstrates a further FDI inflow decline.

The downward trend in FDI inflows are noticeable in all important sectors like automobiles, pharmaceuticals, infrastructure, construction and computer hardware.

It is important to state that the nature of FDI is important in shaping the industrial and economic development of the country.

In India, FDI inflow is largely focused on exploiting India’s domestic market. Furthermore, close to half of all FDI inflows go towards acquisition of shares, including the complete buyout of existing companies.

FDI in export-oriented manufacturing remains insignificant, while that in Special Economic Zones is still low compared to our competitors China, Vietnam, Malaysia and Indonesia. The insignificant amount of export-oriented FDI inflows into India is a cause of concern in the context of fulfilling the goal of Self-Reliant India.

Several factors are responsible for the low level of export-oriented FDI in the country. First, despite the remarkable improvement in India’s performance on the ease of doing business index over the past decade, the country has a long way to go to address the challenges faced by foreign investors in business operations.

Not only is the cost of entering and exiting high, it is also loaded with a complex web of administrative, regulatory and operational challenges. For example, if a foreign firm wants to close its business operations, it faces significant regulatory and bureaucratic hurdles during this process, which is not only lengthy and cumbersome, but also full of bureaucratic harassment.

Now, imagine that the same firm wants to invest in India once again after a few years. It will think multiple times before going ahead.

Therefore, it is imperative for policymakers to understand that business enterprises seek a facilitative environment for both entry and exit. A predictable, transparent, credible and efficient business environment is vital for attracting international investment.

Second, India has signed a number of bilateral trade agreements as well as part of regional trade agreements, such as the India ASEAN FTA. It negotiated trade and investment chapters in bilateral and regional trade agreements.

It remains unclear how its trade liberalisation commitment complements galvanising foreign investment. More than 65 percent of FDI inflows in the country come from Mauritius, Singapore, the US and the Netherlands.

FDI from Mauritius and Singapore, is mainly in the form of portfolio investment, not direct investment in manufacturing. One of the reasons for the low level of FDI from FTAs partners is the lack of coherence between trade and investment policies.

The sub-optimal investment from FTA partners also inhibits the ability of the country to participate in Southeast Asian regional production networks. Studies have highlighted that export-oriented FDI to enhance GVC integration is crucial for value capture, inclusiveness and supply chain resilience. This can be achieved only through a greater degree of coherence between policies related to trade, investment and competition.

Third, India’s efforts to overhaul its domestic regulatory framework are significant. The introduction of the labour code, insolvency and bankruptcy code, GST process reforms, are steps in the right direction.

The need for reforms at the business and operational levels is needed to make a significant impact on creating enabling business reform in the country. We should take a cold hard look at critical areas of reform and acknowledge that the hunky-dory narrative will not help the country become a manufacturing hub. High cost of capital, inverted duty structure, and inadequate institutional and factor market (land, labour and capital) reforms are the main barriers to export-oriented FDI.

Lastly, the Department for Promotion of Industry and Internal Trade (DPIIT) that oversees India's existing FDI policy framework, needs to create a separate section to ensure fast-track clearance of all export-oriented, FDI-related projects. This department should work closely with states to ensure that all efforts to promote export-oriented FDI are implemented in a well-coordinated and coherent manner.

This will address the thrust areas of Self-Reliant India and help the country emerge as a manufacturing hub.

(The writer is associate professor, Jindal School of Liberal Arts and Humanities, O P Jindal University, Sonipat. Views are personal)