Why easing FDI norms could sound the death knell for #MakeInIndia

QUICK PILL

The policy

• NDA is easing the norms for FDI in single-brand retail

• Hi-tech firms will no longer have to make in India to sell here
• UPA had allowed this FDI, saying it would create manufacturing jobs

The harm

• Foreign firms will just import their products and sell in India

• India will lose out on high-end technology transfer

• It defeats the basic purpose of the policy: create manufacturing jobs

By diluting the norms for FDI in single-brand retail, the Narendra Modi regime has ensured that its ambitious 'Make in India' mission never takes off.

The government wants to waive the 30% domestic sourcing requirement "in certain high technology segments" where "it is not possible for a retail entity to comply with the sourcing norms".

What this means is that a "high tech" company selling a product in India would no longer be required to source 30% of its component parts in the country. It can just import the product and sell it here.

Promise not kept

In effect, the move has defeated the very purpose of the policy, brought by the UPA government in 2011. The UPA had allowed 100% FDI in single-brand retail, promising that it would create jobs in the Small and Medium Enterprises sector. How? The policy required foreign brands - operating independently or owning over 50% stake in Indian entities -- to source 30% of the value of merchandise from SMEs.

In 2012, the definition of "30% local sourcing" was expanded to include sourcing from any Indian company instead of just SMEs.

The latest move will benefit companies like Apple that have refused to open retail stores in India because they are not willing to source locally. Apple's major components are manufactured and imported from China and Taiwan.

Indeed, Apple has been lobbying the government for just such a policy dilution for a few years now.

Recently, during his visit to the US, Narendra Modi had met Apple CEO Tim Cook and asked him about the company's plans to make in India. While the media had reported that Apple favoured manufacturing in India, the latest policy decision clearly indicates otherwise. That's a big loss for the country, not just in terms of job creation but transfer technology as well.

After Modi met Tim Cook in US, it was said Apple plans to #MakeInIndia. His govt has ensured it won't

For instance, the Taiwanese company Foxconn has announced it would set up a $5 billion manufacturing base in India. Since Foxconn makes Apple products, it was hoped the company would bring the technology to manufacture such hi-tech products to India. The dilution of the sourcing requirement has put paid to such hopes, thereby depriving the country of cutting-edge technology.

More hi-tech companies are set to follow suit.

"Indian companies at the moment are not in a position to supply to high-tech companies. The next phase of reforms would require the government to look into this issue that the Indian manufacturing faces," said Dhiraj Mathur of PwC, an expert on regulatory matters.

Good money, little gain

So, if these companies won't manufacture in India, what gain would they bring by opening fully-owned stores here?

The NDA government believes that foreign retailers need time to choose India as their manufacturing base. But this means providing these companies unlimited access to the Indian market without getting anything in return.

Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises, is disappointed with the decision.

"I am really sad that the 30% local sourcing clause has been removed. While it is true that Indian SMEs or even larger companies are not yet in a position to supply components to companies like Apple, but the idea of the policy was to encourage these companies to set up manufacturing bases in India and transfer their technology," Bhardwaj said. "But nothing has happened in all these years."

The government also believes that easing the local sourcing norms would create jobs in the retail sector as hi-tech companies would open their stores here. This argument doesn't really fly as companies like Apple are already selling their products through franchises. They would mostly only shift employees from the franchise shops to company-owned stores.

What does this mean for Indian manufacturing and Make in India?

No country for jobs

Manufacturing accounts for 14-15% of India's GDP. The government wants to increase it to 25% to create more jobs.

India is mainly an exporter of low-cost goods. The West wants access to the vast Indian market to sell their high-end products but do not want to make here. This arrangement is to India's disadvantage, particularly as China is fast becoming the world's manufacturing hub for hi-tech products.

Consider the data. India's share of global manufacturing is a little over 2%, while China accounts for 22.4%.

According to Engineering Export Promotion Council, China dominates the global engineering trade with 12.3 % share while India accounts for a mere 1.2%.

In bilateral trade too, China has over the years taken a huge lead over India. From 2003-04 to 2014-15, India's merchandise trade deficit with China has shot up from $1.1 billion to a massive $48 billion.

This begs the question: should we seek FDI even if it doesn't really create jobs?

India is one of the top FDI destinations globally. In 2014-15, FDI inflows into the country rose 22% to $34 billion when, globally, FDI fell by 16% to $1.23 trillion. In the first half of the 2015, India is said to have received FDI of $31 billion, surpassing China and US.

Not everyone is impressed with these numbers. Emkay Global, a leading brokerage firm, has rapped the government for celebrating the growth in FDI inflows.

"The recent media hype over India surpassing China and US in FDI inflows is supposedly considered an affirmation of the success of 'Make in India," Emkay Global said in a report.

"However, data suggests that FDI flows have centred on exploiting domestic consumption rather than stimulating domestic manufacturing. It is likely to have catalysed imports."

In Africa, foreigners used FDI to capture resources. India must guard against this: @abhardwaj_fisme

Bhardwaj shares this view. "For many years, Africa received a large amounts of foreign investment. But has it benefited the local people there? No. The FDI was used to capture the resources of the local people by the companies. India needs to make sure the same is not repeated here."

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