Pragmatism on investment

News: Recently, India’s foreign direct investment (FDI) policy was altered through a press note. But the government is re-examining extra scrutiny on Chinese investment.

What was changed in FDI policy?

Investment from countries with which India shared a land border would no longer be allowed through the automatic route. They have to be cleared in advance.

This was done to curb opportunistic or strategic takeovers by Chinese companies. However, there is a need for large-scale re-evaluation of the process because proposals valued at about $6 billion have been delayed by bureaucratic requirements.

What are the flaws existing with extra scrutiny on Chinese investment?

 First, an overall roadblock reduces investment because flows through the global financial center of Hong Kong were also scrutinized.

Second, there are also effects on the attempt to attract global supply chains to India because the supply chains are not single-owner, single-unit enterprises.

For example, A large mobile handset maker has a chain of supporting subcontractors. Some of these might be Chinese-owned. To make India an attractive destination for the handset maker would require the involvement of its subcontractors.

Third, Indian policymakers realized that economic openness should not be ignored while focusing on “self-reliance”. It is essential to be a location for global supply chains.

Fourth, India’s attempts to develop mass manufacturing and key frontier sectors will be nil, if it does not understand the feature of global value chains.

What is the way forward?

One, all recent tariffs or industrial policies should be evaluated.

For example, the production-linked incentives (PLI) scheme for semiconductors. The government has set aside a subsidy of $10 billion for a new fabrication plant. This has a strategic significance because there are bottlenecks in the semiconductor supply chain in the whole world.

But it must not create a high-cost, protected enclave domestically.

Two, it is essential to balance efficiency, strategic autonomy, and the reality of trading networks, and the government should take a flexible and pragmatic approach.

For example, A semiconductor supply chain that passes through India must be deeply integrated with the rest of the world and reflect India’s comparative advantage in design.

Source: This post is based on the article “Pragmatism on investment” published in Business Standard on 18^th Jan 2022.