India’s Economic Initiatives: A Magnet for Investments

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By Dezan Shira & Associates
Editor: Melissa Cyrill

The Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government has introduced a multitude of economic programs since 2014. Make in India remains the flagship initiative; all other development programs seek to complement it.

Each new program addresses specific electoral campaign promises, and is followed by a promotional-blitz wherein catchy slogans highlight fundamental aims. The latest one, announced just last week, is Start Up India.

Make in India, Digital India, Smart Cities, Skill India, Housing for All and Start Up India are the government’s top priority economic projects. They collectively envision India as a high-functioning economy focused on industry, innovation and entrepreneurship; the promotion of investor confidence; job creation; the development of infrastructure; and achieving total digital connectivity.

The effectiveness of these programs, some barely few months old, cannot be fully assessed until they mature over the next several years. However, preliminary assessments can be made on the basis of industry projections, the level of collaboration between central and state governments, the commitment of private sector participants, and FDI flows.

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Make in India

India’s manufacturing sector is stagnant in comparison its flourishing services sector. Make in India thus aims to boost investment and industrial production to increase the GDP share of manufacturing from the current 16 percent to 25 percent. To achieve this, the government has identified 25 focus sectors for development. 100 percent FDI is allowed in all sectors except Space (74 percent), Defense (49 percent) and News Media (26 percent). A key emphasis of this campaign is improving the ease of doing business in these sectors – faster clearances, transparency for permits and financing, as well as efficient e-governance mechanisms.

Since the launch of Make in India in September 2014, FDI into the country has witnessed a 48 percent jump in the seven-month period between October 2014 and April 2015, and a 31 percent increase, valued at US $9.50 billion, between April and June 2015. It is still early days, and critical infrastructural developments are needed to convert investment into manufacturing gains. Nevertheless, Make in India affirms that India is open for business.

Digital India

India currently exhibits a pronounced digital divide. While it has the second-largest online population in the world after China, more than a billion Indians still lack access to internet facilities. The government is trying to fix this imbalance through its Digital India initiative, which has three core areas – the creation of digital infrastructure, delivery of e-governance and digital services, and spreading digital literacy. Slated for completion by 2019 on the basis of a selective public-private-partnership (PPP) model, Digital India aims to connect 250,000 gram panchayats (village councils) in three years, build a national information infrastructure by March 2017 (at a cost of about US $2.3 billion), and establish public Wi-Fi hotspots among other plans.

The development of this infrastructure will help boost investment in the immediate term. Thus far, US $74.07 billion in investment has been announced for the Digital India mission, along with the generation of employment for 1.8 million people. Indian companies such as Reliance Industries, the Aditya Birla Group, Bharati Airtel and the Tata Group have all pledged investments, while foreign companies such as Google, Facebook and Microsoft are also contributing. Once this digital infrastructure is established, foreign investors will be able to exploit a rise in digital innovation, efficiency and productivity across India’s economy and government.

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Smart Cities

A huge obstacle in the way of India’s development is its problematic infrastructure. The Smart Cities initiative aims to create cities where basic infrastructure is built on a sustainable model. Under the initiative, smart cities should also benefit from assured water and electricity supply, sanitation and solid waste management, urban mobility and efficient public transport, IT connectivity, e-governance and citizen participation and the safety and security of citizens. The Ministry of Urban Development has selected 100 cities and towns as future smart cities – every Indian state has at least one such city. The Smart Cities Council India has been formed and will be part of the U.S.-based Smart Cities Council – a collective of smart city experts and organizations operating in over 140 countries.

The Indian government has set aside US $7.2 billion for the Smart Cities mission, and the money will be released to local urban bodies over five years. This funding will translate into job creation and sectoral growth, raising the profile of respective Indian states as ideal business and investment destinations. In order to succeed, the Smart Cities mission will require complete center-state cooperation, financial accountability by state and local governments, bureaucratic efficiency, effective public-private-partnerships and investment flows.

Skill India

India has a unique demographic dividend. The country has a high proportion of working age population, while accelerated economic growth has increased the demand for skilled manpower. At the same time, India is also a very difficult country to source skilled labor. The Skill India campaign was launched this July to prepare graduates and workers alike for the skills needed by industry. The goal of the program is to train 400 million people by 2022 over the next seven years through the National Skill Development Corporation.

The flagship scheme under the Skill India mission is the US $226 million Pradhan Mantri Kaushal Vikas Yojana (PMKVY) that will train 2.4 million youth and certify them through a portable “skill card”, which can be scanned by prospective employers. Under another programme, the Skill Loan scheme, loans will be offered to 3.4 million youths to attend skill development programs over the next five years. Additionally, the National Policy for Skill Development and Entrepreneurship 2015 has been formulated, and is India’s first integrated national policy for developing skills and promoting entrepreneurship on a large scale.

While Skill India goals will take time to bear fruit, it must be noted that labor reforms and the organization of the informal sector are also necessary. These reforms will further boost the scale and productivity of Indian labor, and allow India’s workforce to genuinely benefit from programs like Skill India.

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Housing for All

An estimated 1.77 million people live without housing in India, according to the 2011 census. Moreover, 65 million people live in slums – a figure that could rise to 104 million in 2017, by some estimates. Overcoming this housing challenge is the target of Housing for All. Under this mission, the central government is set to build 20 million homes for the urban poor by 2022, which will coincide with the 75th year of India’s independence. This will require investments of up to US $181 billion – the state exchequer has already committed US $45 billion.

Housing for All will be rolled out in three phases. Altogether, it will rehabilitate slum dwellers and provide affordable housing to the poor through credit-linked subsidy as well as via a public-private-partnership (PPP) model. As of August 2015, the government has identified 305 cities and towns across nine of the 15 states that have signed Memoranda of Agreement (MoA) with the Ministry of Housing and Urban Poverty Alleviation for the program.

The project is bound to boost the economy as the construction sector typically has a huge multiplier effect. But achieving the mission’s goal will be no easy task – it necessitates the transformation of existing urban infrastructure, and improving basic municipal service provision for water, electricity and sanitation. It will also depend on city-state relations – bureaucratic approval processes will need to be fast tracked, while authorities will need to ensure that programs actually benefit intended beneficiaries.

Start Up India

In his Independence Day address on August 15, Modi announced the government’s latest initiative “Start Up India, Stand up India”. The program is designed to promote financing for start-ups and incentives to boost entrepreneurship. Start-ups had already been a part of the government’s campaign to promote job creation through entrepreneurship, and it is included in the objectives of the Skill India and Digital India initiatives. The Start Up India campaign will, however, see another form of assistance to people who want to start new ventures and businesses, particularly those from demographic groups that have experienced discrimination.

Towards this end, Modi has urged banks to provide loans to dalit, tribal and women entrepreneurs. He has also launched the Bharat Fund at the Startup Konnect program held during his visit to the U.S. this week, which will provide seed funding to Indian entrepreneurs in the health, agriculture, financial inclusion, renewable energy, biotechnology and technology sectors. Despite being only a month since its announcement, Modi’s recent speeches and talking points during the U.S. trip clearly reflect that Start Up India is a key priority for the government – it will promote institutions supporting entrepreneurs in the country.

 

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Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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