Indian Economy (Industrial Finance in India) by Shubhangi Singh

Model Answer

Question #1. Give an account of the current status of the semiconductor industry in India.  Do you think that the recent move by the government to introduce “Design Linked incentives”, will give a major boost to the semiconductor industry in India?  10 marks (150 words)

Approach:

• The question requires analysis of semi conductor industries in India
• Contextually introduce with semi conductor industry
• Explain whether recent move by the government will give impetus to this industry
• Then write about what more is needed to be done in this regard
• Conclude by suggesting way forward

Hints:

Semiconductor industry, which is now an inseparable part of almost all sectors, has emerged as one of the most important industries. It forms an essential part of all electronic items. Ministry of Electronics and Information technology has announced the Design Linked Incentive (DLI) Scheme to offset the disabilities in the domestic industry involved in semiconductor design in order to not only move up in value-chain but also strengthen the semiconductor chip design ecosystem in the country. 

Current status of the semiconductor industry of India:

• The global semiconductor industry is currently valued at $500-$600 billion and caters to the global electronics industry currently valued at about $3 trillion.
• India has a very fast growing electronics system design manufacturing (ESDM) industry. India also has a strong design base.
•  According to the Department of Electronics and Information Technology (DeitY), nearly 2,000 chips are being designed every year in India and more than 20,000 engineers are working on various aspects of chip design and verification. 
• The government has a strong focus in developing the ESDM ecosystem in India. Several subsidies and other incentives are on offer for setting up electronics manufacturing units in India. The Union Cabinet has allocated an amount of ?76,000 crore for supporting the development of a ‘semiconductors and display manufacturing ecosystem’.
• A report by Deloitte estimated that the Indian semiconductor market may reach $55 billion by 2026 with more than 60% of the market being driven by three industries.

Ways in which Design linked Incentive will give a major boost to semi conductor industry in India:

• Increased Participation: 50% of the project cost across all technology nodes for establishing semiconductor labs, including cutting-edge computing chips and those used in the power, telecom, and automotive sectors will be funded by the government. With such high incentive more players are entering the semi-conductor industry leading to an increase in manufacturing base.

• Incentivize companies:??The scheme was initially introduced in India to incentivize companies for incremental sales of products manufactured in India over the base year. They have been particularly intended to increase domestic manufacturing in the sunrise and strategic sectors, minimise import bills and curb cheaper imports, improve the cost competitiveness of domestically manufactured goods, and promote domestic capacity and exports.

• Promotes in house production: PLI aims to provide subsidies to companies that manufacture their goods in the country as the government offers incentives for additional sales in form of tax breaks and reduced import duties. These schemes are linked to the organisation’s performance. 

• Domestic Resources: The semiconductor industry is an important and time taking component in the electronics ecosystem for countries like India. All our efforts to make motherboard and networking will get more local components with the rise of the semiconductor industry while cutting on the import bill.

However, for rapid development of the semi-conductor industry following steps will be required:

• Bring manufacturing closer to home with both entirely new fabs and the expansion of existing facilities.
• Manage the diversification risks and challenges that come with localization and friendshoring.
• Digitally transform and digitize many parts of their processes: financial planning and operations, order management, and supply chain.
• Address and balance the semiconductor talent equation: shortages in some roles but layoffs in others.
• Establish and accelerate the path toward achieving environmental, social, and governance goals, particularly around sustainability.

India is poised to be the second largest market in the world from the perspective of scale and growing demand for semiconductor components across several industries and applications. The government’s initiatives, from ‘Make in India’ to “Design Linked Incentive”, will help accelerate this journey but will need some additional reforms to increase local manufacturing and sourcing of semiconductor components. If this is done, the semiconductor market can be a major contributor to economic growth, and India’s push to become a $5-trillion economy.

Question #2. Why is India still an attractive investment destination despite a falling rupee and other impediments?  Suggest short term and long term measures that India can take to maintain the FDI inflows.  15 marks (250 words)

Approach:

• The question is analytical in nature and invokes our curiosity to ponder on why despite the depreciating rupee; India remains an attractive destination for investment to foreign investors.
• Introduce by stating in brief the challenges that Indian economy recently encountered that led to depreciation of Indian economy and how despite such factors it was able to keep up with decent foreign investment.
• Discuss the reasons behind India still being an attractive destination despite falling rupee.
• Mention separately the long term and short term measures that can be taken to maintain FDI inflows.
• Conclude by stating the significance of foreign investment in an economy or by describing how India has been able to maintain its FDI inflows.

Hints:

India aspires to become a developed and high-income country over the next 25 years. Though the global Covid-19 pandemic, rising inflation, and the ongoing conflict in Ukraine have dented the Indian rupee, India has been able to effectively handle the economic setbacks through fiscal support. According to a report of CII-EY, India has a potential to attract FDI flows of $475 billion in the next five years.

Reasons why India is still an attractive destination despite a falling rupee: 

1. Enormous Market Potential: India is currently the world’s most populous country which provides enormous potential for market growth. India’s median population age is between 28 and 30 years. India has a young working population that will be a key driver of long-term economic growth in the country. 
2. Government Support, Reforms and Policies:  Global investors are interested in India due to its apparent stability in inflation, fiscal deficit, and growth. Overall, India remains a very appealing destination for investment, with investors appreciating the macroeconomic stability that the government has been willing to impose even in difficult circumstances. 
3. Low Manufacturing Costs: India has one of the world’s lowest manufacturing costs and scalability. According to a BCG report, India ranks second among world countries in terms of lowest manufacturing costs.
4. Abundant manpower: India has one of the world’s youngest populations, with more than half of the population under the age of 25 and more than 65% under the age of 35. This provides a consistent supply of labour at a low cost. India’s skilled and semi-skilled workforce is a valuable human resource. Labor is cheap, which lowers production costs and increases competitiveness.
5. Rapid Business Reforms: The country’s purchasing power is enormous. These elements will undoubtedly entice any investor. Recent reforms have included changes to FDI policy, the implementation of the Goods and Services Tax (GST), and other business-related reforms that have improved the Ease of Doing Business.
6. Favourable Industrial Climate: With appealing industrial policies, programmes such as Skill India and Digital India, and significant investments in industrial corridors, seaports, airports, roads, and railways, India provides a favourable investment climate for manufacturing firms.
7. Liberalized FDI Policy: The FDI ceiling in insurance business has increased from 49 percent to 74 percent. The government action towards liberalized FDI policy has resulted in higher FDI inflows in India even amidst the heavy selling by foreign portfolio investors. 
8. Streamlined labour laws: The government has taken a few steps to streamline labour laws to provide a conducive business environment. India has begun the National Single-window System, which will become a one-stop shop for approval and clearances desired by investors, entrepreneurs and Business Inc.

Measures that India can take to maintain the FDI inflows:

Short term measure to Increase FDI inflows: 

1. By simplifying incentives and making them automatic for all investors acting within the framework of tax and customs legislation, economies in transition could make their investment climates more attractive.
2. By simplify registration procedures, reduce price controls to a minimum, dismantle trade barriers, foster favorable conditions for private sector development, 
3. By putting an end to bureaucratic interference, strengthen financial institutions and banking supervision, create a commercially oriented infrastructure, and give foreign investors a greater opportunity to participate in privatization.
4. Doing better job of marketing, identifying potential foreign investors and providing them with complete information about investment opportunities.
5. Provision of guarantees for foreign investments and programs for direct investment in small businesses can help in scaling up investment in a country.

Long term Measures: 

1. Government policies/decisions: are of crucial importance in creating a conductive environment for global investors. The disruptions induced by the pandemic have given opportunities for India to expand its global footprints.
1. The government is striving to strengthen the FDI environment through an array of policy initiatives such as Make in India, Invest India, Investment clearance cell and reforms at all levels.
2. This also has to be complemented by a sound trade policy to boost exports further, encourage inclusive development, and incentivize R&D (research & development) to make our industry globally competitive.
3. The manufacturing sector and the agriculture sector needs to be hyped in order to bring more FDI into the sectors to create parity among all the three sectors.
4. FDIs have more potential to facilitate the growth of the Indian economy than Foreign Portfolio Investment (FPI). It should be ensured that India remains an attractive, safe, predictable destination for serious, long term investors.
5. A level playing field is necessary if we want continued foreign investments. Sneaking loyalty towards local players should be avoided.

India's FDI inflows have increased 20 times from 2000-01 to 2021-22, this was mainly due to the government's efforts to improve the ease of doing business and relax FDI norms. Whether it is prioritizing macroeconomic stability by establishing a framework to combat inflation, doing GST reforms, creating a common market, opening new sectors, privatization, or infrastructure development, India has effectively overcome the current challenges with a strong political will.