MAKE IN INDIA & FOREIGN INVESTMENT

Questions can be asked in Mains :

1. is India’s service-led growth sustainable in the long run..discuss
2. services have grown tremendously, but the significance of manufacturing cannot be ignored . critically evaluate
3. In India’s growth story service sector has grown at the cost of manufacturing .  do u agree ? substantiate your arguments
4. Discuss the make in India strategy . What are the medium and long-term impact of such a scheme? what are some of the challenges that make in India faces today ?  what is the way out..
5. What is the contribution of make in India in solving India’s jobless growth issue? Analyse

Service led growth in India :

• most of the developing economies in the last decade have undergone a structural shift. the share of agriculture in the total value addition has declined significantly … the share of the manufacturing and services sector has increased with the share of the manufacturing sector is increasing at a faster pace than the service sector ..  India is a unique case in these aspects . in India the decline in the agriculture sector has been picked up by the service sector, now it accounts for 50% of GDP
• through the growth of service sector in India is in line with the global trends … there are 2 unique trends in India’s service-led growth …
  • share of agriculture has declined and that of services has shot up over a period
  • inspite of rising share of services in the total GDP , there hasn’t been corresponding rise of employment in the service sector…
• This jobless growth of India’s service sector , with no corresponding growth in the share of the manufacturing sector ,,, this has raised doubts about its sustainability in the long run 

Why has services grown in India at the cost of Manufacturing?

• Policies favoured services and disadvantaged manufacturing..
  • eg : license . u cannot diversify your products – a person producing cycles cannot produce risksha’s without government licensing… but this is not the case in service.. eg – a doctor who get specialised with surgeries can perform surgeries also without any prior permission…even if manufacturing sector apply for licensing. it might take many years or months… to get the approval. so there is a kind of bias in the Economy on the manufacturing sector compared to the services
• services were lightly taxed than manufacturing ..
  • customs , excise.. octrai.. toll… cess.. – all are imposed on manufacturing products.. in total the rate of taxation of manufacturing before GST , it is around 25-28% .. but in case of services u dont have such huge taxation structure
• inadequate attention to physical infrastructure has constrained manufacturing than the services
• trade and Foreign investment regimes were made favourable to services than the manufacturing

Services have grown tremendously, but the significance of manufacturing can’t be ignored :

• The demographic dividend which the country is witnessing cannot be accommodated in the service sector along – Why : it requires high skills.. so the low & middle-skilled groups cannot be absorbed into the services
• currently, sector have low absorption potential
• there is also skill gap in the economy. where there are jobs on offer . but the vast majority of young workforce is not skilled enough to be absorbed into these relative skilled jobs
• the Balance of Payment crisis which India faces is due to the service led growth . How – this pattern of growth has increased the anomaly between domestic absorption – consumption and investment of citizen and government & Domestic production
• A/c to the estimates.. the share of domestic goods absorption was 75% in 2000 & 67% in 2010… share of goods in domestic production is 51 and 43% .. so high and growing net of imports were needed to meet the requirement of domestic absorption. Net export of services can never be adequate to finance more than a small fraction of the required import of goods
  • Eg : in 2010 net export of services could conceivably have financed at most 30% of merchandise imports
• High level of current account deficit reflects the anomaly between domestic absorption and domestic Production generated by a long period of service led growth 
• so the resumption of growth required increase in the production and export of manufactured goods 
• India stands at the beginning of the manufacturing-led growth phase.. this is why Govt of India has launched ” Make in India ” initiative in 2014

The Linkage Effect of Manufacturing sector :

• no other sector does more to generate broad based growth and increase standard of living than the manufacturing sector , reason is the underlying linkages it have with the other sectors of the economy
• its linkages with the dozen other sectors of the economy will ensure that manufacturing output stimulates more economic activity than any other sector of the economy  . this is called Multiplier effect of the manufacturing  . But this manufacturing cannot be unregistered manufacturing which suffers from low productivity and rate of growth of productivity . registered manufacturing has the potential to absorb the country’s large pool of unskilled labour and is also more attuned to export oriented production
• At the same time the effort to create labour intensive manufacturing sector need to be complemented with rapid and continuous skill upgradation of the work force , because skill intensive sectors are dynamic sectors & sustaining their dynamism will require that the supply of skills keep pace with the rising demand of these skills

MAKE IN INDIA

 

A global initiative launched on sep 25,2014 to invite both foreign and domestic investors to invest in India

• is based on four pillars , which have been identified to boost enterpreneurship in India , not only in manufacturing but also for other sectors … These four pillars are
  • New Processes – recognises ” ease of doing business ” as the most important factor in promoting enterpreneurship in India .. initiatives were already taken to improve ease of doing business
  • New Infrastructure  – government intends to develop industrial corridors and smart cities , create world class infrastructure with the state of the art technology and high speed communication . innovation and registration activities are promoted through fast paced registration system and improved infrastructure for IPR regime . skill requirement of industry need to be identified and accordingly development of workforce need to be taken
  • New sectors – MII has identified 25 sectors in manufacturing , infrastructure and services activities.. detailed information is being shared through the web portal .. FDI has been opened up in Defence , insurance , medical devices , construction , and railway infrastructure in a big way
  • New Mindset – government shall act as facilitator and not regulator

E-Biz portal  would provide 24/7 online, real-time , platform for all central regulatory clearances

• • in partnership with the state governments… state clearances will also be brought into this portal
  • a dedicated cell for substantially revamping the query process
  • nodal officers identified in all key ministries to handle queries on the website
  • investor facilitation cell will provide assistance to investors regarding their queries

Medium and long-term impacts of the Make in India initiative :

1. Job creation
2. Pan India approach in creating manufacturing hubs
3. sectors like exportation , communication , textiles , architecture , telecommunications , are like to flourish and strengthen the Indian economy
4. attract FDI and bring Forex too
5. Brand value of Indian merchandise will increase over time . small manufacturers will get access to global platform and market , Ebiz portal will help these small manufacturers to get licenses and other things… which other wise would have taken them years to get approval and upgradation
6. benefit in terms of technological transfer in the strategic sectors like Defence , Aviation …
7. will improve business climate in India and will help improve ease of doing business

sectors chosen in the MII are mostly capital intensive sectors… so what should be done is include 3 or 4 more sectors which are labour intensive.. why capital intensive.. because the over all intention of MII is not just  about employment creation ,but also technological transfer , upgradation , FDI , increase in trade , export oriented industrialisation… and to increase our global share in trade .. because it is said that ” economic might is the only power which will decide geo politics of the future “..

Challenges for Make in India :

• Raghuram rajan – an incentive driven ( incentivising manufacturers to manufacture more ) , export led growth , or import substitution strategy , may not work for the country in the current scenario , where developed world is witnessing a tepid recovery , in a situation like this market expansion to accommodate new players is limited ..
  • what he mean by this is he believes that in the next few years.. demand in all developed nations is going to be slowed down , due to various reasons ( Brexit in Britain , structural reforms in China , global wars , country’s running Fiscal deficit , India too facing this slow down due to the structural reforms like GST ) .. so A/c to Raghuram rajan if we follow this kind of growth strategy we will end up creating more inventories and there will be no takers 
• He warned against focusing only on a particular sector like Manufacturing just because it has worked well with the China , India is different and the circumstances of its development are different .. government should create an environment where all sort of enterprise can flourish and leave business to choose what they want to do
• instead figure out the public good ( basic infrastructure – roads , railways , power … ) each sector needs , and start to provide them . as the external economy demand is like to be muted for the next few years.. it is better to focus on producing for the internal market and a GST should be top on the list
• social activists are also against big push for manufacturing policy .. as it require large tracts of land for industrial units, which will dlsplace thousands of people and create environmental degradation
• another big worry – to emerge as a low cost manufacturing location , india need to keep wages low and ensure labour discipline even if that need anti-labour laws and policies .. Presently there are 60 labour laws in India ,so this multiplicity need to be reduced

                                                         FDI IN INDIA

Phases in Indian economy –

1. till 1991
2. 1991-2000
3. 2000-2014
4. 2014 onwards

1947-1980 : controlled economy

• Allocation of resources by the government ( budgetary grants )
• govt took initiatives in putting up the priorities
• self reliance was the buzz word then

                                    FOREIGN INVESTMENT IN INDIA 

Questions  

1. why was FIPB scrapped ?
2. what is the mechanism of dealing with Foreign Investment in India . discuss ??
3. critically evaluate the effect of scrapping of FIPB
4. what do u mean by Foreign portfolio investment ? what constitutes FPI in India
5. what do you mean by Participatory notes . what are the issues involved with participatory notes as an instrument of foreign investment in India . how are PN regulated in India
6. Discuss the evolution of Foreign investment policy in India ?
7. Discuss the Pro’s and con’s of FDI in retail sector
8. Discuss some of the recent steps taken by Govt of India to promote FDI in India
9. What do u mean by External commercial borrowings ? what are its components ? Discuss its utility for a country like India

Why was FIPB scrapped ?? 

• FIPB was setup in 1990’s to vet investment proposals
• housed in Department of Economic affairs in the finance ministry , for processing FDI proposals & recommending for approval to the finance ministry  if the investment amount exceeds 3000 crore
• there used to be two routes for FDI’s in India – 1) Government approval – which is through the FIPB route… which is a complex way and requires many approvals & time taking process .. 2) Automatic route – no need of FIPB approval.. it can invest without any permission of the finance ministry .. over a period of time.. most of the sectors in India were allowed to go for automatic approval route which doesn’t need the permission and vetting by FIPB , even close to 100% investment in India were put under the Automatic route.. the only requirement is you have to report that investment to RBI with in One month … so FIPB has become irrelevant in this case.. its a kind of unnecessary bureaucratic structure in the way of investments ..

after scrapping FIPB , how would FDI clearances be processed ??

• individual departments of the government has been empowered to clear FDI proposals in consultation with Department of Industrial policy & promotion.. DIPP will issue the SoP ( standard operating procedure ) for processing FDI
• timelines are fixed regarding the approval of FDI . rejection by the concerned department has been made difficult. as it needs the concurrence of the DIPP
• FDI from pakistan , Bangladesh , FDI proposals in private security agencies , small arms manufacturing requires approval of Home ministry

DIPP – DIPP works towards formulation and implementation of measures for growth of industrial sector it also encourages technology acquisition in industry & responsible for IPR policies

• FDI in retail and export-oriented units , & by NRI’s will be approved by DIPP ; FDI in banks will be approved by the department of financial services
  • recently Raghuram rajan has said that there is no need of dept of financial services, when there is already finance ministry taking care of the over all financial sector , this dept is leading to delay in the decision making and he believes that it is unnecessary bureaucratic structure
• DIPP undertakes the quarterly review of FDI proposals

Govt gave following reasons for scrapping FIPB :

• red-tapism will shrink , ease of doing business will improve and the investments will rise

Evaluation of the Move :

• 90% of investments are now done under the Automatic route so there is no need of FIPB, there are only 11 sectors which requires the government approval which now will be dealt by the concerned departments
• the efficiency of this move will depend on the ability of the individual ministries to exercise discretionary powers without fear and favour
• Bureaucrats are likely to remain cautious till the government carries out the changes it has promised to the anti-corruption law to protect them from the wrath of the auditors and investigating agencies for the bona fide decisions taken on the line of duty

FDI’s has surged in India after a lull period from 2009-2013 … long-awaited FDI easing norms were carried out . but the cumbersome regulations remains the same .. cumbersome rules , not the FIPB responsible for the less than enthusiastic response from the foreign investors in some sectors .. Despite allowing 100% FDI in food items.. foreign investors are not allowed to use the small shell space given to them for non-food items. so in a sector which can boost farm produce and create millions of jobs.. due to cumbersome rules and unnecessary bureaucratic constraints.. investor plans are affecting .

FOREIGN PORTFOLIO INVESTMENT 

Based on the report of ” committee on the rationalisation of investment routes and monitoring of foreign portfolio investments ” under K.M.Chandrasekhar in 2014 were notified and GOI put in place a new FPI policy

Why was it done? 

• FPI stands for those investors who hold a short-term view on the company compared to FDI.. we wanted our policy in Foreign investment to be in line with international practice… so in order to compare the policy in foreign investment, we need to reform.. so this is why FPI was institutionalised
• FPI’s generally participate in the stock market & get’s in and out of a particular stock at much faster  rate
• globally , FPI are those who hold less than 10% in a company .. In India the closest possible definition to an FPI is FII

What constitutes FPI in India now ??

• under new FPI regulations, 2014. it was decided to create a new investor class called ” Foreign portfolio investor ” by merging three existing investor classes
  • FII – institutions incorporated outside India which propose to make an investment in India
  • sub-accounts – they are person’s resident outside India, on whose behalf an FII proposes to invest in India. FII and sub-accounts have to register with SEBI .. eg : Foreign corporates, foreign individuals, charitable trusts
  • qualified foreign investor – QFI’s .. there are 2 conditions to be met to be called as QFI in India –
    • 1) resident of FATF ( financial action task force ) – it acts to work against money laundering, terror financing, black money etc.. formed by G7 , India is a member… any nation that is not a member of FATF is conducting unreported financial transactions or indulging in round tripping, money laundering, tax haven… then a country from FATF can blacklist that country.. and when a country is blacklisted under FATF , no other country will perform any financial transaction with that country .. in 2015 India wanted Singapore to renegotiates its tax treaty with India so to make it more stringent.. but Singapore was not ready  to do it.. fearing loss of investments.. so India warned Singapore to blacklist it under FATF.. then Singapore renegotiated the treaty
    • 2) resident of signatories to IOSCO’s MMOU – International organisation of securities commission; Multilateral Memorandum of Understanding – this MMOU is an effort to combat cross border frauds & misconduct that weaken global market . its main focus is cooperation in securities market in its member countries
    • QFI are governed by RBI & SEBI
• it is now decided to dispense with  mandatory registration with SEBI & a verification risk based approach is adopted to smoothen the entry of foreign investors into Indian security markets

Features of FPI :

• 10% cap
  • A/c to FPI Policy , investment upto 10% shareholding by a single foreign investor in an Indian firm is FPI
  • more than 10% is considered as FDI
  • differentiation between FDI & FPI is needed for regulatory purpose
• 24% limit
  • All FPI taken together cannot acquire more than 24% of the paid up capital ( the final fund received by a firm by a shareholders )  of an Indian company
  • Indian companies can raise this 24% ceiling by passing a resolution to that extent by the board of directors

Classification based regulation of investors :

• categorised based on associated risks with them.. 3 categories are there

1. investors related with the government – banks , sovereign wealth funds , government agencies
2. entities like banks , asset management companies , investment companies , broad based funds like mutual funds , investment trusts
3. not covered under 1 and 2

Registration requirement are progressively difficult based on the category it belongs

sovereign wealth funds – SWF are state owned investment fund , means under gov control ;  commonly established from BoP surpluses , official Foreign currency operations , this investment proceeds , fiscal surpluses , export of resources .

• many countries using SWF have economies more reliant on one source of income . Eg : Oil revenues in Middle east . in case of down in oil prices and reduce in their revenue.. to prevent such conditions these countries use their only resource to create infrastructure , or invest in the bonds of other countries or invest in other countries as FDI.. this is known as Risk Hedging  SWF is a good way for them to diversify and become less reliant on a single source of income .
• country which went for SWF not generated by its commodity is China. china’s SWF was created to diversity its Forex .. this is kind of risky job.. what China is doing is creating an SWF using its FX reserves.. and inturn using those resources to create infrastructure in their own economy.. so why risky ?? – if the project fails or the infrastructure projects goes wrong.. then two things will happen.. 1) FX reserves will be gone.. 2) The banking system will collapse ..
• India is doing good on this front as of now.. by being cautious… many argue that India too should create its SWF and invest in infrastructure using those SWF.. but Indian policymakers feel that time yet not ripe for such risky thing in India

broad-based funds – these funds are incorporated outside India with greater than equal to 20 investors plus no single investor should have more than 49% shares.

• FPI registration is carried out by SEBI Designated Depository Participants on permanent basis… unless suspended or cancelled

Participatory Notes :

• issued by FPI’s registered with SEBI to overseas investors who wish to buy Indian equity & debt instruments without registering with the indian regulator
• 2014 when SEBI defined the FPI’s.. PN’s were also got defined
• under the new definition. PN’s can be issued only be selected Foreign portfolio investor’s against securities held by it that are listed or proposed to be listed on any recognised stock exchange in India 

Suppose i am an FII and i am registered with SEBI’s Designated Depository participants as an FII … now i have invested in the securities of a company.. and i am holding 9% share of the company .. and suppose if there is someone sitting in US who have large resource ( what high net worth persons generally do is they invest in many instruments ) is interested in Investing in India but don't want to be regulated by Indian agencies (SEBI ) so he finds an FII who is registered with SEBI under 2014 rules.. and that US person will buy the FII shares which i have got… so now the FII shares will be with me.. but the profit on that will pass on to that other individual who wont get registered or exposed to the regulatory authorities

This is one of the way of converting black money into white money .. how – while investing in PN’s you dont need to show your identity or the source of your income.. FII’s do it on behalf of you as they are registered with SEBI.. so black money can be easily invested in FII and FPI’s and can formally become white…

since the last 10 years 67% of FDI in India is through PN route only… it doesn't mean that all the investment is black or fraudulent , but it is true that PN’s are largely being mis used in India … so what should the government do ?? i can ban them ?? – no it cant.. coz if they ban it.. India will end up loosing huge investment.. considering the low level of our banking and other financial systems we cannot afford to lose them.. so what should be done ? – regulate them