By N Chandra Mohan
India’s growth lost its stride even before it was devastated by Covid. But the ruling NDA, led by PM Narendra Modi, harbours ambitions of making India a $5-trillion economy in five years. The transition from the current size of $2.7 trillion to $5 trillion needs a massive step up in investments, both domestic and foreign, especially in greenfield projects. The government has prioritised an infrastructure-led push for growth, amounting to $1.4 trillion. As budgetary resources are constrained due to slower growth and the animal spirits of domestic entrepreneurs to invest are low, foreign capital is being invited to play a huge role.
The big question is whether foreign capital would oblige. The problem is that FDI into India, of late, is less interested in setting up greenfield factories, industrial parks, etc, and more in M&As in brownfield assets. Last year, for instance, foreign equity inflows rose by 27%, to $64 billion, mainly due a surge of 83% in M&As, amounting to $27 billion in ICT, healthcare, infrastructure and energy, as per UNCTAD. As these investments entail acquisition or taking equity stakes in existing facilities, the implication is that only a fraction of the FDI inflows are creating fresh assets in the economy.
However, not so long ago, India was the world’s leading recipient of greenfield FDI—$63 billion and $62.3 billion in 2015 and 2016, respectively, according to fDi Markets of the Financial Times Group— after reforms-friendly Modi took office in 2014. The country was also one of the world’s fastest-growing large economies, at a clip of 8% and 8.2% in FY16 and FY17. The then CEO of Unilever, Paul Polman, told a leading business daily in 2017 that he “would love to have an economy of your size, growing at 5 to 6 per cent. Anybody would love to have that trajectory. At Hindustan Lever Ltd we have doubled our business in about seven to eight years. We have created in Hindustan Lever in the last eight years…. what took us a hundred years to create”.
Since 2015, the flurry of greenfield proposals were exemplified by China Small and Medium Enterprises’ investment of $740 million in an industrial park, Beijing Auto’s project for $300 mn, Tsinghshan Holding’s $1.2 bn investment in steel, BBK Electronics’ $900 mn plans in telecom, among others, according to US-based AEI’s China global investment tracker. Property magnate Wang Jianlin’s Dalian Wanda also made a $10 bn commitment to build an industrial park. Global auto players, too, ramped up capacities. Maruti Suzuki India Ltd, which accounts for 50% of India’s car market, built its third factory in the state of Gujarat. Ford built its second plant in Gujarat. Mercedes Benz intended to double its assembly capacity.
This surge hit a downtrend thereafter ($23.5 billion in 2020), when India’s growth also decelerated from FY17 onwards. Many big-ticket investment plans did not materialise or were shelved due to difficulties in doing business in the various states, regulatory uncertainty and land acquisition problems. An additional difficulty was the case-by-case scrutiny of investments from China on national security grounds in April 2020. None of the earlier Chinese proposals in autos or industrial parks took off. After investing $2.5 billion, Ford has exited the Indian market, following General Motors, Harley Davidson and MAN trucks. Steel giant Arcelor Mittal has had no success with greenfield projects.
FDI numbers thus began to show a growing preference for brownfield investments through M&As. Between 2015 and 2017, the biggest Chinese investment deals included the $1.1 billion takeover of Gland Pharma by Fosun. MG Motors India, a subsidiary of SAIC Motor Corp that acquired a 50% stake in GM India in 2009, has acquired the latter’s facility to roll out SUVs. It has also shown interest in Ford’s facilities. Proposals worth $17.6 billion during April-June this fiscal, mostly from China and Hong Kong, being scrutinised by the government, are mostly for brownfield projects. Arcelor Mittal established its footprint in India by acquiring Essar Steel for $6 billion.
If foreign capital is to contribute to making India a $5-trillion economy, it is necessary to incentivise a much larger proportion of FDI inflows towards greenfield projects. Such investments depend on a more stable policy and regulatory framework than the streamlining of procedures and digitisation of paperwork that have improved India’s ranking in World Bank’s Doing Business indicators (that has now been discontinued). Reform to free up the land and labour markets and improving the environment to do business in the states is imperative.
The author is Economics and business commentator based in New Delhi