Pragmatism on investment

India should accept the reality of supply chains

On April 17, 2020, India’s foreign direct investment (FDI) policy was altered through a press note. Investment from countries with which India shared a land border would no longer be allowed through the automatic route, but would have to be cleared in advance. This was widely known to be targeted at opportunistic or strategic takeovers by Chinese companies, and followed some high-profile acquisitions in critical Indian commercial concerns and tensions along the border. Since then, there have been some minor alterations in this policy — but it has now been reported that a large-scale re-evaluation of the process is underway, apparently because proposals valued at about $6 billion have been delayed by bureaucratic requirements.

The motivation for the extra scrutiny on Chinese investment is easy to understand. But it is welcome that the government is re-examining it. There may continue to be a case for scrutinising large investment or takeovers in specific strategic or infrastructure sectors. But an overall roadblock has been revealed to have some obvious flaws. For one, it cut down on overall investment because flows through the global financial centre of Hong Kong were also scrutinised. There were also effects on the attempt to attract global supply chains to India at a time of rebalancing away from China. The fact is that supply chains, including in large-scale manufacturing, are not single-owner, single-unit enterprises. A large mobile handset maker, for example, has an entire constellation of supporting subcontractors. Some of these might well be Chinese-owned. Making India attractive for the handset maker would necessarily involve also being a possible destination for its subcontractors and ancillaries. Restrictions on Chinese investment would thus serve as a roadblock in this effort.

If the government is indeed re-evaluating its policy, it is thus a sensible response to the realities of 21st century supply chains. It is to be hoped, in fact, that this is revealing of a broader enlightenment within the Indian establishment about the indispensability of economic openness even in an age of “self-reliance”. Being open to investment and trade, including through low and predictable tariffs, is essential if a country is to be a location for global supply chains. India’s attempts to develop mass manufacturing as well as certain strategically vital frontier sectors will come to naught if it does not properly understand this feature of global value chains.

All its recent policies — whether in terms of tariffs or industrial policy as expressed through production-linked incentives — should be evaluated through this lens. The PLI scheme for semiconductors is one particularly high-profile such example. The government has set aside a possible subsidy of $10 billion for a new fabrication plant in India. This programme may well have strategic worth at a time when the entire world has had its eyes opened to the dangers of bottlenecks in the semiconductor supply chain. Yet the PLI system must not create a high-cost, protected enclave domestically. A semiconductor supply chain that passes through India must be properly and deeply integrated with the rest of the world, and also reflect India’s comparative advantage in design. Balancing efficiency, strategic autonomy, and the reality of trading networks is not an easy exercise. But it is an essential one, and the government must be prepared to take a flexible and pragmatic approach.