Abusaleh Shariff and Amir Ullah Khan
The comparisons are unfair. One country is led by a nationalist Prime Minister who has been a steadfast friend and a source of personal inspiration. The other country is led by a President who has been adversarial and a reluctant ally. Abeeconomics and Modinomics are remarkably similar. Japan has been investing in infrastructure and manufacturing both sectors dear to the Prime Minister’s heart. And most importantly, while the US President might be wary of China, he is overtly friendly to India’s mighty neighbour. Japan on the other hand makes no bones about its animosity towards a country India competes with on all fronts, including on serious border disputes. No wonder PM Modi is off to Japan on his first trip outside the subcontinent for bilateral discussions, and is also now spending an extra day beyond the three originally scheduled.
On top of the agenda will be manufacturing. Modi has advised Indian Industry to promote brand ‘(made in) India’ across the globe by producing and exporting quality products. However the impact of this high level budge can be lacklustre. Quality of the goods and services of day-to-day use, for example, has improved reluctantly and slowly over the years, upon the opening up of the economy during mid 1980s and decisively after 1991. Yet R & Dexpenditure is poor and often considered wasteful due to weak association with immediate cash flow. The level of competition in manufacturing sector is meek and has not matured yet. The Indian industry and manufacturing must improve design, durability and safety besides being visibly pleasing and environmentally friendly, to define ‘Brand India’.
The rules of free trade and openness are supreme in the interplay of international investments,and India has to set its priorities correct, lest those trapped in poverty suffer. So far the dominant FDI destinations are in the services sector and real estate; which must be redirected to massive infrastructure creation, power generation, oil and gas extraction, refining, health care including pharmaceuticals and food production and processing. Indian industry therefore will have to focus its attention on these core areas, with the aim of developing quality products that are innovative, efficient and differentiated. The new business models needs scaling up and reaching out to sectors that will define growth in the future.
Why do we however sense some procrastination on part of the Indian Industry? There are two sides to this - the demand and the supply. Exposure to the ‘goodies of the new world technology’ is new and consumer has limited knowledge of consumer choice and rights. On the supply side in spite of assured returns of over 30 per cent per annum, the Indian industry is not motivated enough to improve product quality. The answers to such anomalies lies in the structure of industry defined in terms of manufacturing methods, technology and market segmentation. The root cause of inertia in Indian industry can be traced to constraints to funding needed for technological up-gradation and increasing the size of firm itself given the expanded domestic demand.
Such constraints are reflected in cost of developmental capital which is far high compared to international standards. There is a growing need for investable funds in almost all spheres of manufacturing and services sectors. Need for capital investment is in all areas of infrastructure (road, rail, port, rivers etc), power generation, oil and gas, refining, food production and processing and many more. Banks are unwilling to lend especially to stalled projects. In other words the FDI and FII needs are immense. What is in India’s interest is assured source of investment funds serviced at a competitive or mutually agreed upon long-term rates.
It is in this context that Japan becomes relevant as the source of cheap investment capital for India’s infrastructural and industrial development. Japan is considered a source of long-term and low-cost finances. ‘Japan International Cooperation Agency (JICA)’ has 60 % stake in creating Delhi metro-network one of the largest in the world and most recent. About $2.7 billion with rates less than 2 % and 22 % of this loan has been on no interest payment at all as per the DMRC annual report 2011-12.
The cumulative total FDI stock has been $ 326.5 billion averaging between 8 to 9 billion dollars per annum during recent years. However the most interesting analysis is regarding the source countries – the UK accounts for 10 %, Japan 8 % and USA 6%. But the irony is that36 % of FDI comes from one country which is hardly known for its status as a global investor– Mauritius. This followed by 12 % from Singapore and 3% of FDI coming from Cyprus makes the quality of funding suspect. Such opaque dealings especially at the international level appear to push India into an uncertain world of development funding. It is in this context that efforts must be made to strike transparent deals directly with major economies of the world such as the USA and Japan.
A word of caution is important here. Firstly, FDIs are not just funds from a foreign nation to India. The virtuous FDI comes with technology, production and inventory managements and exports. Japan as a source of FDI appears good as a source of funds but not as a destination of exports. This may be one of the reasons why major Japanese investments are in infrastructural development as these do not have export components. The USA is the largest consumer market in the world with a 30% share. It will be in its long term interest that India strategically enhances its engagement with USA that not only provides cheap capital and ultra-modern technology but also is the largest consumer markets in the world.
Secondly, there are two real constraints - Japan is facing an uncertain economic future and a depressed consumer market; and on the other hand, the US is reluctant to invest in India. It is imperative that India identifies factors for US procrastination and overcomes them. One caveat though is to find how much of American investment is routed through Mauritius, Singapore and Cyprus. Why does this happen? What is the role of NRI investments from US and Europe in this puzzle? The European Union should also be on India’s priority list, though it is still in recession. There is a dire need for reverse FDI from India especially into Africa that shows a palpable increase in average incomes with a growing size of the consumer market. India must quickly make its presence felt in this continent and not lag behind China and USA.