Two news items on Monday caught my attention. The first reported Ratan Tata’s views that the Investment Commission (IC), which he headed, should be wound up principally because of lack of follow-up on its recommendations. The second item quoted the commerce and industry minister as saying that the government is likely to announce a new manufacturing policy by the end of March, and that in his view the share of the manufacturing sector in India’s gross domestic product should increase from the present 16% to 25%. Bravo!
But do we really need another brand new policy for the manufacturing sector to push up its growth rate? We already have the recommendations of the IC, most of which, according to Tata himself, have not been implemented. Not only that, we also have several reports, including the National Strategy for Manufacturing from the National Manufacturing Competitiveness Council, and a comprehensive set of recommendations in the industry chapter of the 11th Plan. Plus we have an assortment of recommendations in reports from think tanks and industry associations. Clearly, we can hardly complain about a dearth of ideas and recommendations to promote manufacturing growth. In fact, the attempt should be, as reflected in the simple four-point action agenda that I suggested in this column earlier, to drastically reduce the number of procedures and requirements and to focus attention on implementing the recommendations that address the most binding constraints. At the least, any new policy document would do well to include a list of recommendations received over the last five years and give us an action-taken report, including the recommendations that have been consciously rejected.
For example, it can be shown that with cumulative foreign direct investment (FDI) inflows in the last four years crossing $85 billion, we have already achieved IC’s recommendation of attracting $72 billion as FDI in the five years starting 2006-07, and also exceeded the annual target of $15 billion with FDI inflows crossing $27 billion in 2008-09. Yet, it seems only less than 40% of these inflows are destined for the manufacturing sector in India, compared with more than two thirds in China. While not detracting from this amazing turnaround (FDI inflows in 2005-06 were hardly $5 billion and the total FDI in the previous decade was a mere $16.7 billion), we must ask ourselves how much of this was because of global factors such as investors trying to diversify country risk away from China, and the “good India story” made to look even better in the context of the global recession, and what could honestly be attributed to measures taken to improve the domestic environment for FDI and investment, in general. Would it not be a fair assessment to say that the spurt in FDI flows during the last four years has happened despite the lack of any real reform and not because of them? One of the first steps, already in the pipeline it appears, would be to rationalize the number of press notes while putting them together and reduce them to a handful that can still address all major concerns.
At present, these press notes and other notifications, with their inevitably varying interpretations and the plethora of procedures and licences, create a virtual maze which can be tackled only by those who have “heels of iron” to run around the corridors and “pockets of gold” to pay the “consultants” and lawyers. This restricts the pool to the large multinationals and excludes the small and medium foreign investors from the mid-west in the US or the Kansai region in Japan or the Ruhr in Germany, who are constantly on the lookout for cheaper locations and lower wages, pressed as they are in an increasingly competitive global markets. We could miss the opportunity of foreign investment moving out of China for a number of reasons, if we do not implement the necessary measures now. Already, Vietnam and Cambodia are attracting increasing volumes, while India’s actual and untapped potential for attracting FDI remains under-exploited. Is it an exaggeration to argue that proper follow-up and implementation of existing recommendations would help India surpass China as an investment destination, especially when Japanese firms are beginning to prefer India as an investment destination over China?
So it may be useful to focus attention on implementing some of the more critical reforms that have already been recommended rather than announce a new set of policy objectives. A focus on implementation will bring greater credibility for the government and immense relief to the investors. It will reduce the uncertainty facing the entrepreneurs and strengthen “animal spirits”. By contrast, announcing “dedicated investment and manufacturing zones” as part of a new policy, for example, will only create one more scheme which will, most likely, be indistinguishable from several that already exist. It will create another set of enclaves, divert policy attention, fragment governance capacity and confuse potential investors. Will it not be far more fruitful to focus on follow-up, implementation and rationalization than announce a new policy?
Rajiv Kumar is director and chief executive of the Indian Council for Research on International Economic Relations. These are his personal views. Comment at email@example.com