3 July 2024 : Indian Express Editorial Analysis

1. The problem with Modinomics

(Source: Indian Express; Section: The Ideas Page; Page: 11)

Topic: GS3– Indian Economy – Investment models.

Context:

Private investment in India has been conspicuously weak despite concerted efforts by the government, spearheaded under the economic strategy known as “Modinomics.” This strategy, which aims to transform India into a global manufacturing hub, has faced significant challenges. Despite measures intended to boost returns on investment, the critical issue lies in the government’s handling of investment risks.

The Promise of Modinomics:

• On the surface, Modinomics appears to be a comprehensive plan designed to attract both domestic and international investors.
• With slogans like “Make in India,” the strategy focuses on creating a favorable environment for manufacturing and infrastructure development.
• Key measures include substantial infrastructure improvements, corporate tax cuts, production subsidies, and protective tariffs for domestic producers.
• However, these initiatives have not translated into the expected surge in private investments.

Risk and Return: The Dual Considerations for Investors:

• While improving potential returns is crucial for attracting investments, it is equally important to manage and mitigate risks.
• Investment decisions are heavily influenced by the balance between potential returns and perceived risks.
• In India, the government’s efforts have largely centered on enhancing returns through various incentives.
• Yet, there has been insufficient attention to reducing the risks associated with these investments.

The Reality of Investment Risks in India:

National Champions Risk

• One significant risk is the government’s occasional favoritism towards “national champions”—domestic firms that are positioned as leaders in specific industries.
• This approach often involves sudden policy shifts that benefit selected companies at the expense of others.
• Such unpredictability discourages broader investment, as firms fear that their investments could be undermined by future policy changes favoring their competitors.

Direct and Coercive State Actions

• Another major deterrent is the aggressive and sometimes coercive actions by state authorities, including arbitrary tax demands and selective enforcement by regulatory bodies.
• High-profile cases involving companies like Cairn/Vedanta and Vodafone, where retrospective taxes were imposed, have significantly damaged investor confidence.
• Although the government eventually rolled back some of these measures, the delays and reluctance have left a lasting negative impression.

Supply Chain Risks

• Manufacturing investments are also hindered by supply chain risks. Modern manufacturing relies on a seamless supply of raw materials and components from global sources.
• However, India’s frequent changes in tariffs and import restrictions create uncertainties about the availability and cost of these essential inputs.
• This unpredictability makes India a less attractive destination for manufacturing investments compared to countries with more stable trade policies.

Lessons from Other Economies:

• Comparisons with other economies, particularly China, highlight the importance of a stable investment environment.
• China’s economic strategy has historically combined incentives for high returns with strong assurances to minimize investment risks.
• The recent decline in China’s growth illustrates the consequences of neglecting investor confidence.
• Similarly, Vietnam’s success in attracting investments can be attributed to its consistent efforts to mitigate supply chain risks through free trade agreements.

Conclusion:

• Addressing the weaknesses in Modinomics requires a balanced approach that not only boosts returns but also systematically reduces investment risks.
• The government needs to foster a more predictable and supportive environment for investors.
• This includes refraining from abrupt policy shifts, ensuring fair regulatory practices, and maintaining stable trade policies.
• While challenging, improving India’s reputation as an investment destination is crucial for sustaining long-term economic growth.

PYQ: Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and a private entity. (UPSC CSE (M) GS-3 2020)

Practice Question:  Despite various initiatives under Modinomics aimed at encouraging investment, private investment in India has remained weak. Critically examine the reasons for this phenomenon with a focus on the balance between returns and risks. Suggest measures that the government can take to improve the investment climate in the country. (250 words/15 m)