Paradoxically, while Prime Minister Narendra Modi has succeeded in persuading Japanese and Chinese investors, he has failed to influence their big American counterparts. Instead, his ‘magic’ and speech seem to have impelled the Indian diaspora alone. While a number of billion dollar projects were signed during his visit to Japan and the Chinese President Xi Jinping’s visit to India, no major deal was signed during his visit to USA. Nor was any major commitment was made by the US government.
Japan set an ambitious target to double its investment in India within five years and committed US $ 35 billion to infrastructure projects for the same period. China pledged US $ 20 billion investment towards Indian infrastructure development in the next five years. It offered technical cooperation for high speed trains, bullet trains and development of Indian railways. To make Modi’s ‘Make in India’ dream a success and to reduce trade deficit, China committed to setting up industrial parks in India and enhanced market access to pharmaceuticals and agro-foods.
Even though the US-India Business Council forecast American investment of US $ 42 billion in the next two or more years, based on their survey of one-fifth of its members, no specific proposal was made with respect to those areas which could gear up the ‘Make In India’ programme. The US is the sixth big foreign investor in India. It accounts for only five per cent of the total foreign direct investment in India. Why is it shying away from investing in India, when it is the biggest foreign investor in the world? Why were American investors not drawn in by Modi’s assurance to roll out the red carpet minus the red tape?
The fallacy lies with the American pattern of investment. Unlike Japan, Asia has never been the target of American investors. Europe and developed countries are the main destinations of US investment abroad. Almost 74 per cent of its foreign direct investment abroad is accounted for by high-income, developed countries that are members of OECD (Organization for Economic Cooperation and Development). Asia accounts for only 15 per cent of US foreign direct investment abroad. Europe alone accounts for over half of its foreign direct investment abroad.
In contrast, there was a paradigm shift in Japanese investment from the West to the East during the last decade. In 2003, the West (US and the EU) accounted for 67 per cent of Japanese investment abroad. Asia’s share was merely 18 per cent. In 2013, the combined share of the US and EU slipped to 56 per cent, which let Asia reap more Japanese investment, with a 30 per cent share.
US investors may have been nudged by Modi’s political outreach and his assertiveness on manufacturing sector. But India’s slow steps towards opening the service sector gates cast a damper on their enthusiasm. Of the total accumulated US foreign direct investment abroad until end-2012, the service sector accounted for 27 per cent, while manufacturing received only a 14.4 per cent share. Among the major areas of US investment in service sectors were finance, banking and wholesale trade.
Given the pattern of US investment abroad, there are three reasons which failed to inspire the American investors. First, the American investors’ interests were rebuffed by the BJP’s aversion to FDI in the multi-brand retail sector. Reversing the UPA’s policy on FDI in multi-brand retail and the plight of Walmart seemed to have stymied the American initiative to look forward to India as a friendly destination. Banking is another area where big American investors are interested. But until now, they have not found the Indian market attractive enough for investment in the financial sector.
Second, unlike Japan and China, US investors in private sectors are rarely supported by the government. In multi-billion dollar projects in developing countries, Japanese private investors are largely backed by financial support from their government. The US $ 100 billion DMIC (Delhi Mumbai Industrial Corridor) project is a case in point. Similarly, almost all Chinese investment abroad is by the Chinese Government. Over 90 per cent of Chinese investment abroad is by Chinese state enterprises.
Third, Japanese and Chinese investments are endowed with political initiatives in addition to business interests. In contrast, US investors only have business interests. With the surge in Japan–China tensions, particularly during the governance of the two heads, Japan’s Prime Minister Shinzo Abe and China’s President Xi Jinping, India has emerged a pivot for both countries to pitch their political dominance in Asia.