Why Japan and not the USA?

Is it prudent for India to be more FDI dependent on Japan than on the US?

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.

How Pro-poor is BJP government?

The BJP fought the 16^th general elections on ‘development agenda’, so it claims yet it was obvious that communalism and anti-Muslim rhetoric was the flipside to the landslide.  The electoral slogans postured the middleclass who were craving for more and faster development as if it can be reaped from standing rice fields.  Development has to happen first before its benefits are realised, and it is a tough and long process.  However, while the urban middleclass was enamoured with BJP’s overtures, the catalytic was the communal undertones expressed in cryptic double meaning statements, body language including colour codes, surrogate sibling overtures (of VHP, Bhajrangdal and other ilks), and engineered communal riots. Sociological and applied economic analysis have supported a trend that religious assertion and glorification of social identity increases as the income levels increase.

The UPA was seen by this influential electorate as more pro-poor and pro-minority.  It is another essay as to why the Indian middleclass postures are anti-poor and anti-minority. Suffice to stress that the newly elected government cannot take such a stand not only due to the compulsions of constitutional guarantees but also demands of the development strategy itself.  Given the history of deep and extensive poverty incidence in India, the BJP government must follow and improve the well laid out policies of poverty alleviation, religious and social inclusion.

BJP’s good luck was the segmented voting behaviour in India. BJP won 280 or 51% of MPs with only 31% of popular votes. In many respects this is the fallacy of India’s democratic system. Although now that BJP is at the helm of power along with ultra-fringe parties such as the Shiva Sena; it cannot absolve itself from addressing the issue of poverty and inclusiveness head on.

The electoral victory speeches, the annual budget presentation and the customary Independence Day speech of the Prime Minister all taken together do highlight the vision of the BJP government with respect to poverty and inclusion. The importance of having toilets near homes cannot be overemphasised, yet culturally its usage is easy said than done. Similarly providing bank accounts to all in rural and urban area is a noble idea to effect inclusiveness, but such accounts are intended to distribute funds not accumulate savings and turn it in to investments.

However, so far there is a lack of emphasis on provisioning of quality and affordable health care to the masses, improving quality of elementary education. Extending educational infrastructure to minority (Muslim) concentrated areas is absolutely essential to achieve the dream of universal literacy. Given the dominance of agriculture, aspects of land reforms and property rights are not even mentioned let alone make it a priority which is essential to augment investments in agricultural and improve productivity.  There has to be clear emphasis on mechanism to improve the MG-NREGA and implementation of the Food Security Act requires greater government attention than the development rhetoric.  Often the deep excluded geographic areas are even excluded in the review and evaluation exercises - most of the government initiated and controlled studies do not meet the methodological standards of the modern evaluation and assessments.

Shooting down the planning commission and replacing it with a committee of economist will centralize the power in to bureaucracy and it a signal towards non-participation of state in nation building. The Planning Commission was amenable to interacting with domestic researchers and ideas carried forward from multi-lateral institutions. The Bhagwatis and Panagariays of this world I am afraid are too trigger happy to shoot down the equity polices of India. It is time that the new government must review immediately the progress in the millennium development goals, human development and poverty alleviation. Further such review and assessment must be undertaken at the level of the district and states.

It is therefore, essential that the BJP government understand unique and intricate relationship between poverty alleviation, inclusiveness and development and ensure that the future social and economic transformation must happen through the process of education and cultural change. In this context two noteworthy situations that inevitably evolve needs to be highlighted. Sectoral (economic) imbalances favouring the modern technology and large manufacturing will receive a much needed boost. Yet what will happen is that millions of workforce trapped in low productive sectors such as farming, traditional artisanship, small business and manual labour would face an extraordinary risk, should the new government ignore their plight in its immediate policy formulation. Secondly, the fiscal pressure and also some ideological difference may promote frugality of social services and social subsidies. This will be an immediate threat to millions of the vulnerable and deprived communities who will face increase in hunger, deepening of poverty amongst selected social groups and geographic areas as well as continued health vulnerabilities.

As a long term strategy the BJP government must initiate immediate actions to ensure inclusive decision making at the local levels namely the panchayats and town-municipalities with nominations of the excluded groups such as the minorities. Envisioning an ‘equal opportunity policy’ and establishing an independent ‘Equal Opportunity Commission’ will go a long way in dispassionately addressing the issue of exclusion in India.