Make in India, but more carefully

The PM has been pushing his “Make in India” programme aggressively. Some results are visible with atleast five foreign smart phone manufacturers, namely Celkon, Foxconn, HTC, Lenovo and Sony, having expressed interest in making in India. European airplane manufacturer Airbus has also shown interest but this may be mere hype because concrete details are not forthcoming. The problem here is that the proposals are concentrated in the manufacturing space of smart phones. Valuable as this may be, it forms a small fraction of the global manufacturing market. Interest has not been expressed by large manufacturers of electronic and defence equipments, pharmaceuticals, chocolate and cosmetic manufacturers, steel and alloys and the like.

Modi has made strenuous efforts to obtain advanced technologies during his foreign tours last year. He has persuaded Germany to help in strengthening the green energy corridor; and for transmission of green energy from wind and solar power into the grid system. The French will provide nuclear reactors for the Jaitapur Project; and assist in building a high speed rail system between Delhi and Chandigarh. Canada will join hands with India to undertake development of Pressurised Heavy Water Reactor for making nuclear power. These efforts of Modi to upgrade the technological status of India are wholly welcome. But these government-to-government initiatives are not likely to have large spillover effects in the private manufacturing space.

The more important danger is that Modi may unwittingly promote entry of not-so-beneficial Multinational Corporations (MNCs) in his quest for promoting “Make in India” on the back of these MNCs. That FDI does not automatically lead to transfer of advanced technologies is an overwhelming evidence of this. A study by academicians from Oxford University concluded that entry of FDI indeed leads to spillover of technologies to the local economy that are not automatic. Specific policies are required for such beneficial effects to occur. A study by UN concludes that most transfers of technology from MNCs happen within higher-income developing countries. Acquisition of technology by developing countries from MNCs is not automatic or easy. Another study by officials of the World Bank concludes that the beneficial impact of FDI can be improved by placing restrictions on FDI. There exist a large number of other studies that point in the same direction.

There is a consensus though that FDI leads to diffusion of some technologies through local purchases. MNCs do not transfer technologies related to their own production processes but help their vendors to upgrade so that they can get good quality supplies at cheaper prices. This beneficial impact of FDI, however, is limited to ancillary activities. The major finding of large number of studies is that technology transfer from MNCs to developing countries is not automatic. The developing countries need to put in place a carrot-and-stick policy for technology transfers to take place.

The long term financial impact of FDI, on the other hand, is largely negative. MNCs make huge remittances to their headquarters in the form of profit repatriations, royalty payments and purchase of raw materials. They often buy raw materials or sell finished goods to their principals. They transfer large amounts of monies from the developing countries by tweaking the price at which these transfers take place. For example, Coca Cola India buys concentrate from Coca Cola USA. Say the actual price of the concentrate is Rs 100 per litre. It is possible that this purchase by Coca Cola India is undertaken at Rs 1000 per litre instead. That would lead to transfer of huge amounts of monies to their principal, a reduction of profits of Coca Cola India and the Government of India would be deprived of the Corporate Income Tax that would have been collected from the profits made by Coca Cola India. As a result, the long term financial impact of FDI is negative.

Challenge before Modi is to strike a balance between these contradictory impacts of FDI. The positive aspects of FDI are transfer of technology, if it takes place. The negative aspect is remittances—both legal and illegal. The strategy should be to ensure technology transfer and reduce outward payments. Here lies the catch. MNCs may not come at all if Modi imposes restrictions and pressurizes the MNCs to transfer technologies. On the other hand, MNCs may come but transfer of technologies may not take place if Modi does not impose restrictions. Either way, we will not get the technologies.

There is a need assess the Chinese experience from this standpoint. It is true that China has attracted MNCs in manufacturing in a big way and succeeded in lifting large numbers of its people out of poverty. However, this has come alongside an exceptionally high domestic savings rate of around 45 percent. Compare this with India’s savings rate of 25 to 30 percent. Also China has aggressively destroyed her environment, the consequence of which will be seen over the next decades. FDI has a positive impact on the host economy in the short run. The tables turn in the long run, however. Now MNCs start remitting profits in a big way. More monies are sent in the form of royalty payments and transfer pricing. China seems to have entered this negative zone in the last few years. The present decline in the growth rates of China is mainly due to these consequences of its MNC based manufacturing strategy. We must, therefore, make a dispassionate study of the long run consequences of the China strategy instead of following that country blindly.

Modi must implement following policies to implement a sustainable Make in India policy. One, ban all FDI through the automatic route. Two, put in place a system of technological and social audit before his government grants approval to a FDI proposal. Three, a Public Hearing must be conducted before a FDI proposal is cleared; as is done for granting Environmental Clearance. Let the people who may be adversely affected by entry of a MNC be given an opportunity to voice their concerns before approval of a FDI proposal. Public Hearing will make it possible for Modi’s officials to correctly assess the impact of a FDI proposal and take a decision that is truly beneficial for the country.

Author was formerly Professor of Economics at IIM Bengaluru

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