India's Union Budget for 2020-21 and Economic Survey for 2019-20 expect private investments, especially foreign, to trigger a virtuous cycle to enable the Indian economy to grow to a USD 5 trillion entity. At a time when budgetary resources are constrained by a sharply slowing economy, foreign capital is being invited to play a huge role in financing infrastructure spending of USD 1.4 trillion over the next five years. 

The NDA government is confident that it can attract such inflows as FDI amounted to USD 284 billion during 2014-19 from USD 190 billion that came in during the years 2009-14. To attract more FDI, Prime Minister Narendra Modi's NDA regime has over the last few years liberalised the sectoral caps in various sectors, allowing greater amount of investment proposals to go through the automatic route. 100% FDI limits for e-commerce, contract manufacturing, further opening up the coal industry, civil aviation, easing the 30% local sourcing norms for single-brand retail exemplify this process of ongoing liberalisation. 

Budget 2020 went further in exempting sovereign wealth funds from taxes on interest, dividends and capital gains if they invested long-term in roads, highways, ports and water supply projects.
   
The USD 5 trillion question is whether private investors will be enthused by these slew of initiatives to initiate a spiral of rapid growth? Investing long-term in infrastructure and green-field projects entail taking a risky bet, considering India’s restrictive land acquisition laws and environment clearances. Tax incentives might not suffice as the investment environment is sensitive to policy and regulatory uncertainty.

India may have jumped the rankings in The World Bank’s Ease of Doing Business but foreign and domestic investors seek improvements in the ease of doing business on the ground, especially in the states. For instance, what sort of signal is conveyed to foreign players in e-commerce like Walmart – which has made huge investments of USD 16 billion in taking over Flipkart - and Amazon when FDI policy guidelines are suddenly changed midway and rules tightened up?

Amazon has so far committed USD 6.5 billion to intensify its market dominance in the country. Of this, USD 1 billion is to digitize 10 million traders, micro, small and medium enterprises. In January, the Commerce Minister Piyush Goyal bluntly stated that this US giant was “not doing any great favour to India” by investing a billion dollars!

To be sure, there are several reasons for the minister’s statement. These include: political compulsions to assure small traders who are the main support base of the ruling BJP party ahead of the February 8 elections in the national capital. The minister also had in mind the fact that Amazon needed fresh funds to finance its cash burn due to “indulging in predatory pricing and or some unfair trade practices”; that many thousands of small retail stores selling mobile phones, for instance, have closed down in the country as they are unable to compete with the deep discounts of Walmart and Amazon.

The minister, however, later claimed that these comments were misunderstood and reiterated that foreign investments were welcome but they have to work within the law of the land. As far as e-commerce is concerned, 100% FDI is permitted but only for business to business commerce, he added. In multi-brand retail, 51 % FDI is permitted but with restrictions. But there is intense opposition from local traders to FDI in multi-brand retail and e-commerce, not surprisingly as Walmart globally employs 2.2 million workers and its turnover of USD 514 billion was three-fifths India’s retail trade in 2019. 

Simply put, the entry of Walmart and Amazon in e-commerce is feared to threaten the livelihood of millions of so-called mom-and-pop retail stores around the country. There are 12 million small and medium retailers employing 40 million people. These stores are mainly in the unorganized sector. The penetration of the organized sector in retail is limited and is expected to go up to 18% by 2021. The small retailers are also being targeted by the deep-pocketed Reliance Group which is making a foray into e-commerce without being subject to the restrictions imposed on the likes of Walmart and Amazon.

Foreign investors also need better enforcement of contracts as they remain concerned over governments that have come to power at the state level to review or cancel contracts entered into by the previous regime. The Shiv Sena-NCP-Congress-led government in Maharashtra thus has decided to review a clutch of big-ticket infrastructure projects, including the prestigious high-speed bullet train project between Mumbai and Ahmedabad. Similarly, in Andhra Pradesh, the new regime has cancelled renewable power projects signed by the earlier government, besides shutting down constructing the new capital city Amaravati.

For such reasons, the flurry of green-field investments announced during the early years after the reforms-friendly Modi-led government took office during its first term in 2014 has levelled off. Many big-ticket investment plans did not materialise or were shelved due to difficulties in doing business on the ground, regulatory uncertainty and land acquisition problems. More than green-field, it is brown-field investments that represent the largest FDI numbers in the country. Last year, Saudi Arabia’s Aramco decided to take a USD 15 billion stake in Reliance Petroleum. After abandoning plans for green-field steel factories in Odisha, Jharkhand and Karnataka, the world’s largest steel manufacturer, Arcelor Mittal, has only now succeeded with its USD 6 billion bid to acquire Essar Steel.

Budget 2020’s reliance on foreign and domestic investors to do the heavy-lifting for kick-starting investments in infrastructure to transform India into a USD 5 trillion economy thus is also a risky bet. 

To become an attractive FDI destination, the momentum needs to pick up on long-pending structural reforms to free up the land and labour markets and improve the environment for doing business in the states. To be sure, the government is attempting to simplify labour laws but whether they impart a greater degree of flexibility is a different matter. The initiation of such big-bang reforms has a bearing on the government’s intent to spend USD 1.4 trillion on infrastructure harnessing private investments.

(The writer is an economics and business commentator based in New Delhi)