Revitalising FDI

India will need to increase its appeal

The government of Thailand has announced that four Japanese carmakers intend to invest as much as $4.3 billion in the Southeast Asian nation over the next five years in order to transform it into a hub for manufacturing electric vehicles, including utility vehicles. Thailand, which is the second-largest economy in the Association of Southeast Asian Nations, or Asean, has long had a productive industrial relationship with Japan. Increasingly, however, it has become a battleground for industrial and geopolitical competition between Japan and China — large Chinese car manufacturers, which have begun to dominate the electric-vehicle supply chain, have also claimed that they will focus on Thailand. These developments will undoubtedly have provoked a reaction from legacy Japanese companies, led by Toyota and Honda. However, from an Indian perspective, the question is whether similar investment is flowing speedily and reliably enough into India’s own automotive sector.

India’s car-manufacturing sector is not exactly struggling. It accounts for over 7 per cent of the country’s gross domestic product, and, in most years, in a single-handed manner, contributes half of India’s manufacturing output. That said, questions can be reasonably asked about whether recent investment flows have been resilient enough to enable the sector’s transformation in an age in which hybrid, electric, and hydrogen fuel-cell vehicles are expected to see sharp growth. Unlike Thailand, India, for geopolitical reasons, cannot expect large flows from Chinese companies. Nevertheless, it does at least have a historic relationship with the Japanese automotive sector among others, which should allow investors to be within their comfort zone when they consider investing in the country. Academic studies have found a large correlation between foreign direct investment (FDI) and output growth in the sector. The Economic Survey of 2021-22 had expected a sustained increase in FDI in the sector, noting that the April-September period of 2021 alone had seen FDI worth $4.9 billion being allocated. The entire year of 2021-22 took that up to $7 billion; but then there was a sharp fall down to $1.9 billion in 2022-23. These are not low numbers, but it is likely that they underperform India’s true potential.

India’s industrial policy for the sector has focused largely on the production-linked incentive scheme (PLI) for big companies. However, although the automobile PLI was notified as long ago as 2021, no disbursement has so far been made. Of the scheme’s 67 applicants, only two — which happen to be Indian and not foreign companies — have been able to complete the process to qualify for subsidies. Clearly the PLI system alone should not be seen as a silver bullet for engaging investor attention in the sector. Other ways in which to ensure that India emerge as a hub for manufacturing and export must be considered. Besides reforms to the business climate in the sector, trade policy must focus on integrating India with the supply chain through trade agreements. While India has a free-trade agreement with Japan, South Korea, and Asean, it must also move forward on FTAs with major market destinations — particularly with the European Union (EU). Time is running out to conclude the EU-India FTA before the general elections. But getting it done in the next few months must be a major national priority.