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Column: Making Make-in-India happen

In some investment-intensive sectors, India must offer a package of incentives to attract global players

By: | Published: October 26, 2015 12:18 AM

A couple of weeks ago, I was talking to an old friend, a senior manager working in the US HQ of a global technology leader, who was visiting India. The conversation naturally turned to the Prime Minister’s highly successful US trip which has built a very positive sentiment about India, and his strong pitch to come and invest as part of the Make-in-India programme. My friend asked me, as many foreign investors do, if there are changes on the ground. I told him yes, there have been many developments on the ground, and gave several areas where there has been progress. I also told him that many more policy changes to make it easier to do business are under implementation or being planned. This was not a sales pitch to a foreign investor. I believe it, and having worked with the government as a consultant on the execution side of things, I have seen the challenges faced in implementing even a well-designed policy, and tried to make him understand the effort and energy it takes to “make an elephant dance”.

Building a strong electronics manufacturing sector in India being an important objective of Make in India, I asked him about why wasn’t his company thinking of making a big investment in India. It was then he told me the story of Intel, another global technology leader, and how close it came to making a billion-dollar investment to set up a chip plant in India in the mid-2000s but finally decided to take it to Vietnam which was just opening up to the world. It is worth reflecting upon what happened for its lessons for Make in India. My friend started by reminding me that investment in the investment-intensive high-end of the electronics value-chain is very lumpy, and made for a decade of future demand or longer given the high investment intensity. And thus, they follow a cycle of large investment which takes a long time to pay off as demand slowly catches up, and rates can vary from country to country. He went on to say that such investments are like the “anchor client” in a new mall; they act as magnate of other investments which over time can build into a thriving ecosystem. A good example was Intel’s investment in the 1990s in Ireland, when that country did not have any electronics manufacturing worth the name but which helped trigger the growth of the electronics industry in that country.

The natural question which I then asked him was why did he think Intel shifted their investment from India to Vietnam? He did not answer me directly but quoted Amitabh Kant, secretary DIPP, from a recent interview to a newspaper, where he said that there is a need to change the mindset of bureaucracy to deliver Prime Minister Narendra Modi’s aspiration for Make in India. Just having a pitch to foreign investors centred on the theme of India’s large and growing demand is not enough, especially when there are many countries gunning for the same investment with very attractive terms. He then made another interesting comment on the difference between a “shotgun” (for example, road-shows) and a “rifle” (for example, a customised pitch) approach to target these large “anchor client” investors with specifically designed incentive package, which is based on an in-depth understanding of the economics of the investment and the investment cycle for the firm. For example, if a chip (or other core technologies that have large multiplier impact in an industry) company has made a large investment recently in another country, there is less likelihood of the firm making another one soon in these days of global value chains, whatever be the incentives offered or the attractiveness of the market, till the other investment starts paying off.

He then went on to discuss another apparent conflict between what a foreign investor wants and what may be essential to build a successful domestic high-tech ecosystem in an investment-intensive sector. Over the last two decades, as India followed the rest of the world in liberalising its trade regime and brought down customs duties on electronic components effectively to zero, there is little incentive for a global technology player for making large investments in the country. Countries from Taiwan to Korea to more recently China have all used customs duty to protect nascent domestic industry till scale and capability. A classic example of another core technology investment-intensive investment which is critical to the development of electronics ecosystem is TFT-LCD panels pioneered by Sharp in Japan in the mid-1990s, which again require investments to the tune of $3-5 billion. Standalone, there is no business case for an investment in a new country as the returns are low. First Korea, then Taiwan and later China, all made huge investments to grow their electronics industry by giving tariff protection to imports, capital subsidy, tax waivers and cash grants for R&D, etc. While my friend understood the logic and need for such measures (even though from his firm’s point of view he did not like it), his one comment was that often a single measure does not work and one needs a package of incentives to make the large investment viable (and more attractive than another country’s offer), which is often difficult in India as different parts of the government appear to be working to different agendas.

His last point was a reflection of India’s journey since the economy’s liberalisation was launched in 1991. He said that if we look at the last two-and-a-half decades, India had built strong positive sentiment with global investors around 1994-95, but then we frittered away and let China become investors’ favourite destination. This positive sentiment built up again around 2004-05, mid-way though the UPA-1 government’s reign, on the back of a strong economic performance, but once again India let this opportunity go, this time to other developing countries like Indonesia, Thailand, Brazil and even Vietnam. We now have our third chance after another cycle of ten years, led by the efforts of our Prime Minister. This time round it is an unprecedented opportunity given that India is the one bright spot among all developing countries (keeping aside China). My friend’s final comment was his sincere hope that this time we will not fritter away this investor interest and deliver on the promise of Make in India.

The author is senior partner and director, Bruce Henderson Institute, Boston Consulting Group.
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