As usual, naysayers have been quick to slam the Modi government, now in its second term, amid the downturn. But blaming the ongoing reforms of the Modi 2.0 administration for India’s poor performance, however, misses a key piece of the puzzle: the Prime Minister is reading from a completely different playbook than his predecessors.
In a sharp break from the past, Modi has sought to limit public spending and instead create the necessary conditions for foreign direct investment (FDI) and private capital to flourish. Whereas the Indian economy under the Congress party was paralysed by mismanagement and an endless parade of corruption scandals, Modi has channelled his administration’s energy into his signature “Make in India” campaign.
To that end, New Delhi has recently passed a number of measures critical for private sector growth: the corporate tax rate was cut in September from 30% to 22%, GST has been rationalised, and FDI regulations loosened. Thanks to recent changes, global technology giants like Apple are now exempt from local sourcing requirements for three years when they open Indian stores, and can now open online stores before they launch into the bricks-and-mortar marketplace.
What’s more, the relaxation of local FDI restrictions come as a response to requests by Apple, and other major foreign investors, over the years. Until now, Apple has had to sell its products through partnered third-party offline retailers and e-commerce platforms; it has also been forced to source close to a third of its productions locally.
“We appreciate the support and hard work by Prime Minister Modi and his team to make this possible,” an Apple spokesperson said of this year’s changes, “we’re eager to serve [our customers] online and in-store with the same experience and care that Apple customers around the world enjoy.”
India’s economic reforms mirror those of other regional giants: when FDI growth in China shrank to 3 percent in 2018, Beijing embarked on a deliberate campaign to reform foreign investment policies. Between January to July this year, FDI flows expanded 7.3 percent year-on-year. The impact on the overall domestic mood for investment has been dramatic, and serves as a critical lesson for Modi- and his detractors.
As they have for India’s ASEAN neighbours, Modi’s FDI liberalisation efforts appear to already be paying off: foreign investment increased by 147% between 2014/15 and 2018/19 to hit US$64.37 billion. Indeed, FDI inflows had already increased in the first year of Modi’s first term, from US$45.14 billion in 2014/15 to US$55.55 billion a year later.
Much of this inflow can be attributed to the work of Invest India, the government’s foreign investment promotion agency. The organisation has its sights set on securing at least US$100 billion in FDI, and has drawn up a list of 200 companies to target to reach this goal.
One such company being welcomed into India’s fold is US retail giant Walmart, via its 2018 acquisition of Indian online retailer Flipkart. This month, the two firms made a joint investment in domestic fresh produce supply chain company Ninjacart in a bid to take on Amazon in the grocery retail space. Walmart’s entry into the Indian market has, so far, been a gift that keeps on giving.
A consortium of international companies (consisting of Russian energy giant Rosneft, one of the world’s largest traders Trafigura and UCP investment Group) made similar gains purchasing Indian refiner Essar Oil in 2017. That deal is the largest foreign investment to date in the Indian economy. The new owners changed the name of the company to Nayara Energy and managed to refinance and reduce debt by almost $500 million in the first two years, prompting credit agencies to increase the rating from A to AA. They also expanded the network of gas stations by more than 1.5 times.
In addition, the shareholders have announced that within the next 3 years they will invest $850 million in the development of the Vadinar refinery for the construction of a new petrochemical unit at the site. With a capacity of 20 million tons of oil per year, the Vadinar plant is now one of the most technologically sophisticated in the world and is a unique success story in India.
In a similar vein, Chinese electronics producer Xiaomi made its biggest investment in India yet earlier this year, with plans to use the US$492 million injection to expand its product offering in the domestic market. That Xiaomi would look to deepen its roots in India should come as little surprise: in the first three months of 2018, the firm sold more than 9 million smartphones. Now, Xiaomi accounts for close to one third of India’s smartphone sales, and more than 95% of those sold in India are made in domestic factories by Indian workers. This year, the firm hit the US$5 billion revenue mark. “Not even in our wildest dreams did we think we would be able to achieve so much in so little time,” claims Manu Jain, managing director of Xiaomi India.
There can be little doubt that India is an increasingly attractive place for FDI, and the Modi government’s embrace of it is sure to pave the way for future growth. A country of India’s scale and facing such a unique set of development challenges cannot solely rely on the public purse; FDI is the only way forward for the Indian economy.
Stay updated with all the insights.
Navigate news, 1 email day.
Subscribe to Qrius