India’s ambition to play a significant role in the global economy started several years ago and has intensified under the current government. Furthermore, the country’s significance is increasing after COVID-19. The upcoming FY2023–24 Union Budget on February 1, 2023, is likely to reiterate this.
What has worked for India recently is the Indian government’s approach to tackle the headwinds induced by COVID-19. Moreover, the effective inflation management by the Reserve Bank of India (RBI) in the high global inflationary environment caused by the Russia-Ukraine war has impressed investors and corporates around the world. The fact that India’s economy is expected to grow around 7.0% in the current fiscal year is a testimony to that. The world’s China-plus-one policy can be the additional kicker that can ensure the sustainability of such economic growth outperformance.
Several measures are being taken to attract investments from China to India, and we believe the government can take many more to ensure this is not a short-term, one-off phenomenon. We also believe that India must not attempt to emulate the scale and extent of China’s global economic contribution but instead target the specific industries and sectors that are going to be at the heart of the global trade for the next several years. In addition, and more importantly, India must look to improve the speed with which businesses can transition from China or be set up in the country.
From a sector perspective, we believe the FY2023–24 budget must talk about the specific industries and incentives linked to the targeted industries to make a compelling argument to attract global businesses and investors. The broad manufacturing industry must be taken up by the government on priority given China’s strong leadership in this space. The other industries that must feature in the government’s long-term plans are the semiconductor, automobile, and steel industries. All three are the key to the global economy, and India already has a strong presence in the automobile and steel industries.
We expect the government to introduce tax concessions and production-linked incentives to encourage investments in these industries. Of course, the development of existing projects such as the one being undertaken by Foxconn–Vedanta in Gujarat, Apple iPhone manufacturing, and Samsung’s smartphone manufacturing will act as excellent barometers to convince other investors and corporates.
The government should also formulate investment plans improving the country’s rail and port network for seamless connectivity to manufacturing hubs, importing key raw materials and commodities, and exporting manufactured goods to key customer locations/regions. Other areas that can be critical to India’s role as a manufacturing hub at the global level are renewable energy components and electric vehicle (EV) battery manufacturing. While China currently leads in the manufacturing of key components for the solar and wind value chains, Japan and South Korea are leaders when it comes to EV battery manufacturing. Renewable energy is currently one of India’s top priorities, and inviting corporates to manufacture key components, such as solar panels, modules, wind turbines, and blades, will only prove economical for renewable power developers in the country.
Another area that will have to significantly evolve to help India achieve its goal of becoming a global leader in manufacturing will be the capital markets. The role of the RBI will be crucial in ensuring the adequate transparency and availability of funds or channels to address the financing requirements in some of these capital-intensive industries. Bank funding channels, equity and debt capital markets, and non-banking financing routes will play a critical role in ensuring that the speed of developing these projects is not impacted.
Finally, the budget must address the need to speed up the process of setting up businesses, manufacturing units, factories, etc., without going through the layers of red tape and bureaucracy. While the government has talked about a one-stop platform for all approvals and permissions, it will be important to emphasize the implementation of the platform and the use of technology in its application.
Concrete ideas and plans to address the problem of procuring land for setting up manufacturing units and factories are also needed. This one factor alone has been responsible for delays in numerous projects. Some investments from large international companies will involve the need for vast areas of land. We therefore believe it is imperative for the government to establish a committee that oversees and anticipates the need for such land and ensures adequate planning in the procurement and rehabilitation of villages and communities on those land parcels.
While we anticipate considerable government push to attract foreign investments into India’s manufacturing industries through the US$1.2 trillion PM Gati Shakti project, the government should emphasize it in the union budget. It should have plans to invite proposals from state governments either as part of the Gati Shakti project or as independent suitors of foreign capital into their respective states. It would be interesting to see any central and state government collaboration in organizing investor meetings and showcasing project progress currently under development.
We accept that challenging China’s position as the global manufacturing hub and capturing some major investments will be a difficult and long-drawn affair. However, it is the ideal time for India to make some bold moves and prove its intentions of becoming a critical part of the world economy to the global community. Strong political leadership, proactive planning, attractive incentives, and commitment by India’s domestic corporate houses are the bare minimum ingredients required for the story to become successful. Moreover, an increasing lower-middle and middle-income earning consumer society makes India’s proposition even more lucrative for global investors.
(Avinash G Singh is Senior Vice President – Investment Research and Advisory at Aranca)