India has not been the easiest of places to do business in, either for homegrown companies or for global manufacturing giants looking to establish a base in the country. In a recent rant on social media, an Indian-American entrepreneur spoke about the number of forms that need to be filled for tax compliance by businesses: 37. Another rued India’s “digitisation”, pointing out that every compliance has to be first met online and then also submitted on paper, leading to corruption. A third said he was the first in his family to start a business, but despite having completed the necessary papers, six months have elapsed without a loan under a certified government scheme.
In the case of multinational companies trying to set up business in India, much of the same official mindset is on display. There are mountains of paperwork to be done, physically as well as online, site permissions take months, local-level corruption is rampant, and the compliance burden remains heavy.
An Exodus of Big Businesses
So, when last week American marquee brand Ford announced that it was halting all production in India after years of being present in the country, there were collective gasps over India’s difficult business environment and policy gaps. The shock and awe over Ford’s exit were justified but the reasons being attributed to the move were not entirely right. India remains a tough place to do business in, sure. And the exit of yet another global brand would affect thousands of livelihoods as well as India’s image as an investment destination, agreed.
But Ford’s exit, and before it, the exit of other well-regarded American automobile brands — Harley Davidson and General Motors — cannot be pinned solely on the Ease of Doing Business (EoDB) status or the lack of it in this country. Several other factors were also at play.
These brands came to India on the promise of a vast and upwardly mobile middle class, as also the prospect of economical manufacturing for supplies globally. Both promises have sunk. The famed Indian market, grossly underpenetrated and widely expected to witness rapid per capita income growth, has not lived up to the promise. The COVID-19 pandemic has only made matters worse, with India’s GDP lower than two years ago. Global markets, too, have suffered due to massive production disruptions and demand shocks, crippling the export potential of many products from emerging markets.
What happened with Ford is faulty planning, along with a joint venture with an Indian partner that failed to take off.
High Taxation, A Challenging Market
Of course, the very high incidence of taxation that India continues to levy on vehicles that are not included in the category of sub-four meter small cars also contributed to Ford’s pain. As did an intransigent state government, which allegedly refused to extend tax breaks to the Sanand manufacturing plant of Ford after it had agreed to the JV with a local business.
In any case, throughout its Indian sojourn, brand Ford could never become the top pick for the Indian buyer, in a market where nearly every second purchase is of a Maruti Suzuki four-wheeler, and the overwhelming majority of buyers pick a “small” car.
The plan always was to split the total production of Ford halfway between exports and domestic sales. Also, as the product pipeline had dried up beyond 2017, Ford was pinning all its hopes on the JV, which would develop and sell products jointly. The breakup of the JV also broke Ford’s future in India. In the case of Harley Davidson, which also exited India, steep trade barriers and high import duties were the culprits. General Motors exited India after years of trying to sell cars but, like Ford, remaining at the fringes of a market that values small, economical vehicles.
Why Couldn't India Make Use of the US-China Trade War?
In yet another instance of a large automobile company finding it tough to gain market share in India, Japanese company Toyota had indicated last year that high taxation was crippling its business. Before being asked to withdraw his remarks by the government, a key Toyota Kirloskar India official had said that India gave out the impression that the brand was “not wanted” in the country. Since then, Toyota is believed to have put brakes on further expansion (and therefore investments) in India, though it has not quit the country, like American brands.
So what should India do to further ease conditions under which businesses can function? And how should it attract more global players to manufacture products here? In a world ravaged by a virulent pandemic and a bruising US-China trade war, India should ideally have been witnessing an increased inflow of investments by global value chains. India offers several advantages in the race for becoming a global manufacturing hub: low-cost labour and a large domestic consumer base, to name a few. After the COVID-19 pandemic severely affected global supply chains, the pitfalls of depending on a single country — China — for imports have come into sharp focus for most global manufacturing giants. They have begun exploring the dynamics of shifting their manufacturing base and investments to countries like Vietnam, Indonesia, Thailand, Malaysia, and also India.
As per the 2021 report by Cushman and Wakefield, India’s attractiveness as an investment destination has increased. We are now the world’s second-best manufacturing destination, after China and ahead of the US.
In its baseline ranking, C&W found that India could benefit from plant relocations from China to other parts of Asia due to its already established base in pharmaceuticals, chemicals and engineering sectors that continue to be the focus of US-China trade tensions.
Short-Term Measures Won't Help
But the baseline ranking does not give out the complete picture. C&S has listed reforms in land and labour laws as being critical to India’s success as a global manufacturing location. And in parameters such as operating costs, India has already been overtaken by Indonesia. In the category of geopolitical risk, India is in the third quartile, trailing China, Canada, the US, and even Indonesia.
We have taken some steps to make India an attractive investment destination. In November last year, the government announced production-linked incentive (PLI) schemes for 10 key sectors to make Indian manufacturers globally competitive, attract investments, ensure efficiencies and make India an integral part of the global supply chain.
And already, we have climbed many steps in the World Bank’s Ease of Doing Business (EoDB) rankings to be at the 63rd rank from 142nd in 2014. But the battle has only just begun. India not only needs significant reforms in ensuring that businesses are easy to establish and then easy to operate, but it also needs to step up reforms in labour and land to attract big-ticket global investments. For the MSME sector, particularly, compliances need to be streamlined further.
For attracting manufacturers who want to take their factories out of China, what a Parliamentary Standing Committee said in February this year may be pertinent — it said the government needs to look into policy changes brought in by countries like Vietnam, Taiwan and Thailand to make themselves more attractive to companies shifting their bases from China. This should be our focus.
(The author is a senior journalist. She tweets @sinjain. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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