Business

A Lot Of Groundwork Needed For FDIs To Come To India

In a bid to attract foreign investors looking to shift their operations out of China, India is developing a land pool nearly double the size of Luxembourg. As reported, a total area of 461,589 hectares has been identified across India, including 115,131 hectares of existing industrial land in few prominent states, such as Gujarat, Maharashtra, Tamil Nadu, and Andhra Pradesh. Unlike China, acquiring land is complicated in India with multiple stakeholders involved, such as farmers and individual plot holders, administrators, politicians, and local governments besides social and environmental activist groups in case the land ownership is contested or the area is part of a green belt. Foreign companies must also comply with stringent land acquisition and labour laws, which delay projects from moving forward or at all. This is the negative track-record that India is looking to leave behind, with media reports indicating that the government will ensure the land being made available for foreign firms is either unused or located in special economic zones (SEZs) with key infrastructure already in place. Sources say that a detailed scheme to attract potential foreign investors may be ready by the end of this month. The move comes right after news broke out that nearly 1,000 foreign firms have been in talks with Indian authorities to shift their manufacturing to India; at least 300 of these firms are actively pursuing production plans in various sectors. The Indian government has hand-picked 10 sectors - textiles, electrical products, pharmaceuticals, medical devices, electronics, heavy engineering, solar equipment, food processing and chemicals-as focus areas for promoting manufacturing in India. So far, firms from the US, Japan, South Korea, and China have expressed interest in moving their operations to India from China. Along with making land available for foreign companies, India is also building local supply chain capacity and providing incentives to boost domestic manufacturing in order to emerge as a viable alternative manufacturing hub for global firms. India will need to assert itself with clear incentives, particularly in the land, tax, & labour domains. Changing the perception that India is a competitive place to do business requires that multiple factors are simultaneously addressed-not mere promises of land availability. Is India ready for foreign firms relocating their setups Land availability is a tested issue for foreign investors. By allocating land outright, India will solve a major concern for foreign firms looking to invest in the country. In the past, companies such as Saudi Aramco, the Saudi Arabian Oil Company, and Posco, the South Korean steel-making company, have faced immense frustrations around land acquisition in India. In case of Saudi Aramco, India is yet to find land for the US$60 billion-dollar oil refinery project, which is jointly constructed by the oil giant & the UAE's Abu Dhabi National Oil Company (ADNOC). The project has faced several hurdles-initially, it was proposed to be built at Nanar in the Ratnagiri district of Maharashtra. However, the project was later shifted to another district in the state due to protests from local farmers. Even after the project was shifted to Raigad, land acquisition continued to be difficult. Since November 2019 there has been no update regarding the project. Likewise, in the case of Posco Steel, the company faced similar hindrances when it tried to set up a US$12 billion steel plant in the state of Odisha. The South Korean company faced resistance in acquiring land, primarily from betel leaf farmers. The MoU expired in 2012, and the project failed to take off. Currently, foreign firms have to acquire land on their own if they are interested in setting up a factory in India. By providing land with power, water, and road access, the Indian government is looking to solve major hurdles for potential foreign investors. However, to develop this land pool, the Indian government will need to work closely with state governments to ensure that foreign investors are not faced with the same challenges again. In fact, the state governments have been asked to build their own programmes in order to attract foreign investments. This will be key and what investors need to assess is: do the pitches from central government officials align with state government ministers and bureaucrats, who are the key stakeholders on the ground, what are the important timelines, and how is the particular industry or sector regulated, to name a few considerations. Firms are advised to seek on-the-ground intelligence about proposed investment sites, local players, reliability of administrative officials and implementation of rules and regulations, clarity on tax incentives and liabilities, the established industrial ecosystem-feeder industries, backward, and forward linkages, real estate market, labour market, and utilities, among other factors. Incentives offered by Indian states Several states in India have relaxed labour laws for new projects in their states to restart industrial activity, and in a clear bid to attract foreign investment. The move has been met with some criticism but it is unlikely that states will roll back these changes. For instance, in the state of Gujarat, all new projects that operate for at least 1,200 days or are operational for 1,200 days will be exempted from all labour laws, except three. Only labour laws pertaining to paying minimum wages, following safety norms, and compensation for workers in case of industrial accidents will be applicable. Gujarat will also allow laborers to work a 12-hour shift, instead of 8-hour shifts, with extra pay for the additional work hours. The Gujarat government says that it has identified nearly 33,000 hectares of land for foreign companies looking to shift their operations from China. Further, the state government is offering incentives for manufacturing units in more than 30 sectors. It is banking on its air connectivity and 48 large ports as a major advantage for investors. Meanwhile, the south western state of Karnataka is playing to its strengths - providing skilled manpower and showcasing an already established industrial and technology ecosystem. The state capital, Bengaluru, is the top spot for foreign investors in India's IT sector. The state government has built a 500-acre Japan Industrial Township for Japanese firms who want to set up in Karnataka. The government has identified land near Bengaluru, and "will also activate work on clusters, including the 'Compete with China' clusters, which have been created anticipating large-scale manufacturing," said a state government official. The northern state of Uttar Pradesh, which is said to be in talks with foreign companies in sectors, such as defense and aerospace, is developing an online system for land allotment for all industrial and commercial purposes. On the other hand, the south eastern state of Andhra Pradesh is looking to provide subsidies to reduce burden on companies who move their production to the state. Meanwhile, Telangana, which is an existing IT/ITeS hub in India, has also carved out a few industrial parks in the state, including the Kakatiya Integrated Mega Textiles Park, Sircilla Apparel Park, four mega food parks, and Pharma City near capital, Hyderabad. With these setups in place, Telangana is ready to pitch itself across diverse industries to foreign investors. India must compete with other Asian countries to attract FDI Major manufacturing and export-oriented economies like Vietnam, Indonesia, and Thailand in Southeast Asia as well as Bangladesh in South Asia, will offer competitive incentives to attract foreign investment into their respective countries. In a study by Nomura, a Japanese financial group, only three out of the 56 companies that relocated their production out of China between April 2018 and August 2019-chose India. Two relocated to Indonesia, eight to Thailand, 11 to Taiwan, and 26 to Vietnam. While India's bold announcement makes land available for foreign companies, it fails to address details-acquisition criteria and role of stakeholders, for example. In the past, clashes with farmers and landowners have led to delays, and even closures of projects. Therefore, the government should ideally acquire the land and ensure that local interests are balanced with the interests of foreign investors. India has to develop its supply chain capacity To emerge as a viable option for foreign firms, India needs to become a part of the global supply chain. Currently, the Indian supply chain only caters to a few industries in a handful of sectors. India needs to continue building and strengthening its supply chain capacity if it wants to emerge as an alternate manufacturing destination. While the country slashed its corporate tax rate last year to compete with the ASEAN emerging economies, New Delhi will need to do more in the form of additional tax incentives, import subsidies, clarity on retrospective tax liabilities, and area-wise support measures. All of these are a given in the Southeast Asians markets who are vying for their share of the foreign investment moving out of China.