The amount of new spending in the economic relief package is relatively low, about 1-2% of India’s GDP, which is far lower than the stimulus packages announced in the US and other major economies
Reform measures announced by the government as part of the ₹20 trillion stimulus package to restart the coronavirus-ravaged economy are critical to make India’s business environment competitive not only with China, Vietnam and Mexico, but with more developed western economies, said Nisha Biswal, president of the US-India Business Council (USIBC).
While a single national market for agriculture and steps to create an efficient energy space are welcome, the prohibition on global tenders below a certain threshold and higher tariffs on some imports could be viewed negatively, Biswal said. The easing of the foreign direct investment (FDI) limit in defence from 49% to 74% will benefit the local manufacturing industry but the government needs to clearly signal that it will acquire such military equipment in the long run. This will give the industry the confidence to invest money and share technology, she said.
Edited excerpts from an interview:
What do you think of the stimulus package India has outlined to restart its economy post the lockdown?
We were pleased to see a significant economic relief package from the Indian government, which is much needed to boost demand and improve liquidity and access to credit for business. The package picked up a number of USIBC recommendations to the finance ministry, including credit support for MSMEs through a credit facility that goes beyond traditional collateral-based funding, deferment of direct taxes and indirect taxes to improve cash flow, and accelerating customs clearances to facilitate trade and availability of goods. In the spate of announcements, we were also pleased to see a focus on several longer-term reforms that will improve India’s ease of doing business, including labor reforms and opening new sectors to private investment. As India seeks to attract new businesses and manufacturing, these reforms will be critical to make the business environment competitive with not only China, Vietnam and Mexico, but more developed western economies. We believe both the short and long-term measures will have positive impact on the economy and give companies the support and breathing room needed for business continuity during this time and build a foundation for India to accelerate as it looks to a post-covid economy.
That said, we recognise that the amount of new spending in the economic relief package is relatively low, about 1-2% of India’s GDP, which is far lower than the stimulus packages we have seen in the US and other major economies. Amid the coronavirus crisis and with tax revenues declining, we are mindful that the government saw its capacity for direct spending as limited. As the economy opens up and improves, we hope the government will consider additional steps to boost demand and support hard-hit sectors and the millions of people whose lives and livelihoods have been impacted by the pandemic and shutdown.
What are the provisions of the stimulus announcement that have the potential to be particularly impactful?
We are optimistic about the creation of a single, national market for agricultural goods, which we also suggested to the government in April. This could help boost farmers’ incomes and substantially increase India’s integration into global trade. We also see potential for measures to finance electricity distributors to promote more efficient energy markets and more affordable energy. These outcomes are critical to making India competitive in attracting foreign investment. Even with this progress, there are some areas of concern. For example, the prohibition on global tenders below a certain threshold may prevent some international companies from bidding on government contracts. Higher tariffs or prohibitions on certain imports make it less likely that other countries will view goods produced here favourably. Both steps are likely to be counterproductive to the government’s effort to attract foreign investment as they reduce potential demand for firms’ products.
Do you think the stimulus and reform steps announced by the government will bring to India those companies who are looking to exit China?
The coronavirus shock has accelerated the push towards supply chain diversification, as companies reassess the risks of relying on one country for supplying and sourcing and the stability of long-distance and just-in-time supply chains. These dynamics create a significant opportunity for India, which has a large domestic market that US companies are looking to tap into, as well as large and skilled workforce. While we haven’t seen a huge shift towards India so far, the Centre and a number of state governments have made a significant push to engage global businesses and work with them to create opportunities for investment. We (USIBC) also continue to advocate for India to create more market access for foreign companies, liberalise trade and tax policies, and as well as make the investments in next-generation transportation and infrastructure that can attract and support global businesses.
The government has raised the FDI cap in defence from 49% to 74%. Will this bring in investments and technology to India?
Raising the FDI cap for defence is a positive development, and is an important first step towards attracting investments and technology to India. Whether it will make a difference largely depends on whether businesses anticipate a return on their investment in a reasonable timeframe. It is important to remember that the defence sector is unique, because it relies on a single customer – the Ministry of Defence. If the government signals its intention to predictably and reliably acquire military equipment over a long timeframe, it gives industry the confidence needed to justify the investment, which also facilitates the sharing of technology.
Despite the calls by Prime Minister Narendra Modi, not too many companies seemed excited about investing in the defence sector. Why is that? There were two dedicated defence corridors that have been inaugurated to concentrate investments in the sector. The one in Uttar Pradesh doesn’t seem to have too many takers. Why?
We’re hearing from industry that uncertainty surrounding the government's procurement timelines coupled with a challenging economic climate presents impediments to investment. Over time, I’m confident that the Tamil Nadu and Uttar Pradesh defence corridors will see new investment, given enhanced incentives like increased offset multipliers. Just as DefExpo did for Tamil Nadu in 2018, the 2020 DefExpo in Lucknow did an excellent job showcasing Uttar Pradesh as a future defence corridor. Defence investments can operate on the timeline of years or even decades, so it’s still too early to pass judgment on the defence corridor concept.
Does the talk of self reliance, indigenisation and a negative list for weapons and platforms and for spares and components worry you?
Self-reliance and indigenisation are understandable goals, particularly in the defence sector. Still, even the US, which has the biggest and most advanced defense industrial base in the world, depends on critical parts and components from allies and partners across the globe. This includes essential parts and components of US platforms that are only made in India. The government has an important decision to make when issuing the Defence Procurement Procedure (DPP) 2020. If the policy is too restrictive, it risks turning away companies that could otherwise play an important role in organically growing India’s defence industrial base and make India an integral part of the global defence supply chain.
With the ISA (Industrial Security Annex) in place, the COMCASA (Communications Compatibility and Security Agreement) signed and BECA (Basic Exchange and Cooperation Agreement for Geo-Spatial Cooperation) being negotiated, how do you see the defence industry technology relationship in the broader India-US context proceeding?
The US-India defence partnership has deepened significantly over the past decade. The signing of foundational agreements including COMCASA and the Industrial Security Agreement (ISA) are significant accomplishments, and once ISA is fully implemented it will be particularly useful for American defence companies operating in India. The US-India defence partnership continued to be a cornerstone of the larger bilateral relationship, and while the COVID crisis means that we won’t just return to business as usual, I expect that defence collaboration will pick back up as both countries reopen their economies. On technology sharing, some restrictions on technology sharing are unavoidable, given U.S. government export controls on sensitive technology and the need for businesses to protect intellectual property. Those should not be a major impediment to the growing relationship between U.S. and Indian defence manufacturers.
India is looking at big ticket investments in the electronics sector. This hasn’t come in. Why is that? Recently President Trump also put Apple on notice saying it should not move production to India. What do you think of that?
The global electronics industry is a multi-trillion dollar sector built over decades through major investments in infrastructure, logistics, education and training. These diversified relationships, ecosystems and supply chains evolve slowly, and companies are still in the evaluation stage as they cope with the significant economic fallout from COVID-19 and assess their next steps. So success or failure should be judged not by the investment we’ve seen so far, but by results in 2021 and beyond.
I’m confident that the forward-looking opportunity remains enormous, if India can capture even a slice of a growing market. India has made important improvements in the ease of doing business, new manufacturing incentive schemes, policy enhancements, and investment in infrastructure. However, much of this work has been done with a focus on India vs. China, where the future opportunity is India vs. Vietnam, Malaysia, Mexico, and even the United States. So while India has done a lot to attract manufacturers, competition is intense and escalating. India also lags in taxes rates, compliance costs, and policy transparency. As the government of India focuses on attracting investment into the electronics sector, specific policies will be needed to enhance competitiveness across a variety of electronics segments -- consumer, industrial, medical and military.