Transcription
What would you say are the first or the most important issues that are currently holding back foreign direct investment? If I were to divide it between two baskets, you know, one is facilitating the regulatory architecture. But secondly, the on-ground issues. We don't have, you know, proper industrial clusters of the type that say China or even Vietnam has.
One thing which Trump has signaled very clearly is that he is pro-business. He is not a big fan of regulations.
And he is basically also very clear that the more you bring in here, the more sort of, you know, we will facilitate it.
2016 to 2026 and 2006 to 2016. Would you say that the 6 to 16 composition was different?
Ease of doing business, unfortunately, sometimes the way the bureaucracy approaches it, I think that the net result is reducing unease as opposed to creating ease.
Be upfront and cut out the hypocrisy and invite not just FDI, but domestic capital and say we are favorable to business. We are for business and we are pro-business.
We're going to talk about foreign direct investment and what we can do to unclog the FDI pipes, so to speak. So, some quick data points before we plunge into the discussion and I introduce my guests. Foreign direct investment in India for 2021-22 was a negative $14 billion. The next year was negative $4.8 billion. The year after that, plus $44 billion. But then again, it dropped to about three plus, that's plus $3.2 billion. But 2025-26, that's the last financial year, it was negative $15 billion again. So, the trend is clearly negative in recent years. So, the question is why and what can we do, particularly from a procedural, policy, tax, and so on point of view. So, to do all of that, I'm joined today by Sudhir Kapadia, Uh senior board advisor and formerly tax senior tax partner at Ernst & Ernst & Ernst & Young India for many years, and Ketan Dalal, founder at Catalyst Advisors. Thank you both for joining me.
So, let me start with you, Ketan bhai. So, you've looked at this very closely. What would you say are the first or the most important issues that are currently holding back foreign direct investment?
So, you know, Govind, one cannot say that there is just one issue. So, if I were to divide it between two baskets, you know, one is facilitating the regulatory architecture.
But secondly, the on-ground issues. So, from a regulatory architecture standpoint, as we are all aware, FDI regime has been substantially liberalized. So, you will have some areas like say banking and, you know, some parts of NBFC, pharma, etc., which is under what we call the government route. And, of course, the ones that we said are land border, which is Pakistan, China, etc. But, really, the regulatory architecture is relatively very benign and very welcoming.
The problem is that there are several other dimensions which are on-ground and operational which are constraints. So, if I might, you know, set out four or five of them. Availability of large tracts of land is a serious constraint.
So, of course, the digitization of land records is happening.
But what And the It's It's I'm not saying it is perfect, but some progress has been made. But availability of large tracts is a very serious issue. And in order to set up large manufacturing setups, you need large tracts of land. So, this is one. The second is, you know, we don't have, you know, proper industrial clusters of the type that say China or even Vietnam has. So, so, let me give you an example. So, for say electronics, for say textiles, for say pharma, now I can't remember the names of those clusters, but as per the what we call the cluster maturity index, China is let's say 10. Uh uh Vietnam is seven, India is at five. So you have, let's say an auto cluster in Pune and an auto cluster in uh say Chennai, but the larger ecosystem is not there. So if you are making a a car, you know, that somebody who's making the silencer pipe, you know, is somewhere in Madhya Pradesh, for example. That is the second part. Third, you know, logistics cost and ease of logistics going is a significant issue. So for example, I think our logistics cost, government says it is eight or nine percent, but I think it's closer to 11 to 12% of GDP. China is eight percent. So you know you know your ability to transport goods, you know, the rail system there is significantly more developed. So I I think India has made a lot of progress, but this kind of thing, you know, and there are many others, but let me just sort of pause here and we can then move forward and take it in.
Uh so what would you focus on a highlight when it comes to looking at So the reason we are obviously discussing this now is because there is so much of discussion, because we are not getting enough dollars, because there is a forex problem.
Yeah, so so Govind, I I would just take a step back and see the figures which you rightly quoted are what is called net FDI. So one thing on the table I would like to place is that we have to acknowledge one fact that actually the first of all the gross FDI has grown. Yeah, and is growing actually quite well. So there is These are the the statistics of gross will tell you the story. Now, when it comes to net FDI, there are two contributing factors. One which I think is a positive from an investor point of view, from a whether you are a strategic investor or a private equity investor, which is to say that I have invested in India and after six, eight, 10 years, I have done a strategic sale and I have been able to take out money from India without friction. Investment bankers will tell you, fund managers will tell you in private that in China it has not been that friction-free and the returns have not been so great either. Now, there are there is another discussion or debate around, you know, overpriced markets in India, but my point is market is a market. You can't, you know, second-judge the market. As an investor, I am happy that despite the recent deceleration in the rupee, I have been able to take out money profitably from India in a clean, efficient, reasonably friction-free, legal manner. So, the net FDI part of that figures you will see is because of the successful exits, which I think is a positive. Yeah. So, that is one. The second which uh needs more research is outbound FDI by Indian conglomerates, which by itself is not bad because Indian we need more Indian MNCs. You need to act, you know, all the reasons Ketan rightly said, you need to be part of the global value chain. Not a problem. Then there is another subset which I think needs more research that have been some recent books written is about the, you know, as Sanjay Baru says, the secession of the successful. How much of that is happening is I think a topic which probably deserves another podcast.
That is something which every country should be, you know, conscious of and should So, I think first of all the FDI story to my mind, if you really look at it in a nuanced manner, is not as negative as the headlines suggest. The second part which, you know, Ketan rightly said is about, you know, the realities on the ground. There I would just like to supplement with two points. One is which we all know that today the story is really at the state level. You have CMs as CEOs of each state and without getting into details and names, we know that certain states inherently are extremely friendly for setting up businesses. And when I say that, it is not about just the entry. I always say that, you know, this is the policy, you get these incentives, you get the which is very important. The land availability very but what is more important is during the life cycle of my project. I'm here forever. We have Indian multinationals so many, you know, which have been there for 100 years. So when I get a new foreign investor, I as a state as the state industry leader in the government or a state CM would like to say that how do I get this business to work and prosper in India? To be in India and prosper for the next 100 years. How do we create the next cohort of Indian multinationals as I would call them which we have seen since independence has happened with a few private company despite your draconian fair provisions of 1973. So that's the second part. And I think the third part which if I may say is a transformative mindset which political leadership needs to bring in with lower level bureaucracy. And what is a transformative mindset which in one of the pieces in the print I have also written to say that the mindset should be not to come and say, you know, what wrong you did this summer. The mindset should be to say what frictions I can remove so that your business can prosper even better than it is today. That I think is a key.
Okay. So on the reason like I said we're talking about FDI today or the lack of it. As you I mean taking your point about gross FDI increasing in this period is because the rupee is where it is and that is exposed the problem of not enough dollars coming in. So even if gross FDI is going up as you see it is and it is there's no denying that but clearly that there's no counter balance to it.
and then there is you see it is never enough right? You see it doesn't mean that we have we have achieved and we have got everything. So I'll just give you two other positive examples in my view. You know, Ketan can have a view on that, but in my you know, experience over the years with the Income Tax Act. I don't think since inception of the Income Tax Act, there has been a single legislative provision which is giving you certainty till 20 years hence, 2047. There have been two provisions in the last budget, which I think is something not enough has been talked about, okay? One is for GCCs to give certainty on what is your you know, sort of tax markup for transfer pricing purposes. The other is to say that where foreign companies procure data from companies in India, you won't create an unnecessary additional layer of tax presence. Both these what I was presently surprised to notice have been plugged in with a date of 2047. So, it is that kind of stability which has been Of course, in our democracy you can say you can somebody can rescind it later, but it's a very, very powerful uh initiative, which I think any successive government will not find it easy to go against. So, the point I'm making is that I think these are two good examples, but I will just add a third where I think more can be done. To give an example, your question as to So, you know, during COVID for again, because there was a mini crisis or actually a crisis, what we did, we brought in capital gains tax exemption for sovereign wealth funds and pension funds because they don't pay tax in their home countries. We said you invest in infrastructure, the date is 31st March 2030. In future, when you sell, you will not have capital gains. So, which is good. What we have we have been now telling the government is that see, even the definition of infrastructure, Circa 2020 is dated. We all know what is happening in it. What will you call infrastructure? AI, data center, so much. Why do you want to restrict it? If you don't want, you know, in gambling, you don't you have a small negative list and say, "Please come." Right? To your point. While we may be doing okay on gross, it can Why can't we make it 2x? Why can't we make it 3x? So, one single thing we want long-term patient capital. To me, sovereign wealth funds and pension funds are the best sources of long-term patient capital. We have a great enabling provision. Take a leaf out of this, your own other two examples I gave, and say, "You know what? We'll make it extended to 2047." Any investments you bring in, this law will remain till then. It will be not subject to capital gains tax as long as you are a bonafide SWF pension in your home country, and have a sliver of negative list where you don't want, you know, tobacco, plantations, gambling. Just, you know, everything else is productive, right, in the economy. So, just another just simple example. I think these steps can go a long way in giving What do investors want is tax certainty. But, now I think it is not just tax certainty, but stability of the tax regime as well.
So, you're saying that uh and let me put this question to both of you. Now, let me start with you. So, uh going by what Sudhir is saying, we are getting most things right. The uh the reason for, let's say, the rupee being where it is, because that's triggered this round of conversations, may be more to do with foreign portfolio investment outflows rather than direct investment slowdown. Or and direct investment outflows as well, which could be one-off. People private equity firms taking out their money, LG, Hyundai taking out uh through OFS, and so on. So, do you feel that it's a it's a swallow in the summer, or is it a trend?
It's difficult to answer it like that, but you know, on the point which you made about this FPI and FDI, uh I think it's also to do with services exports having taken a hit.
So, software companies, for example, and I know that is not the topic of our discussion, as also the fact that when you have 88% dependency of import for oil, you know, and with what has happened in the US-Iran, and hopefully we are seeing the end of it, Lindsay, uh you will have that problem. But, you know, couple of other things, taking off from what he said, and to answer your question, you know, you used the word patient long-term capital to the sovereign funds, I understand. But, you know, if you see the total FDI, first of all, it has increased only marginally. In fact, compared to 5 years ago, it is the same. If you forget reinvested earnings, the gross FDI is the same in 5 years. Maybe marginally increased. So, it has not gone up that much, and that is itself a cause of worry. The second uh point is do you know on this certainty also? Uh yes, Sudhir correctly brought out the you know, GCC certainty and the data and all. But, you know, you have to look at it as a larger landscape. So, I have a slightly different view. You have to look at it as a larger landscape. And when you look at the larger landscape, you know, the problem is you will you have so many sudden surprises springing up that it becomes a problem. So, you had, of course, many years back Vodafone, and I think Govind, we still haven't lived down Vodafone even now, 15 years later. You suddenly had Tiger Global. Now, Tiger Global judgment, you know, and many of the viewers and listeners to this podcast, and may may know that, but just to make sure that we are on the same page, Tiger Global was dealing with a situation of a investment made pre-1st April 2017 by by a Mauritius company, and it was supposed to be grandfathered. The whole purpose of the grandfathering was that you will not charge capital gains, and the government itself went in litigation. And the Supreme Court, unfortunately, held what it held, and that has created tremendous discomfort. The third point I want to make, you know, is even out of that $58 billion, um, almost half, or slightly more than half, is private equity. And private equity, yeah, is it the same as FPI? It isn't. So, it's not that they're going to come in tomorrow and, you know, day after tomorrow, they will go out. No. But they private equity works on the basis of carry. Obviously, the carried interest is what drives private. The world of private equity driven by carry. So, their horizon is 3 years, 5 years, 7 years, usually 5 to 7 years. So, you know, it's it's not like a an IBM or a lever or a Siemens investing in India. So, that money also going out is a problem. What we really want is long-term capital coming in by way of primary infusion, and particularly in the manufacturing sector. I did some research, and I found that about 50% of the FDI, at least in the last 1 or 2 years, has been secondary buyouts. Either buyouts or minors minor stakes. Which means that capital formation is not happening, and that has a whole host of second level and third level impact, say, on employment. So, you know, again, we have to when we are we are looking at FDI, there are so many nuanced questions. You can't look at FDI as FDI. You see, is it private equity FDI or strategic FDI? If it is strategic FDI also, is it a buyout or is it infusion? And I think the real FDI that we should unclog the pipe, which you mentioned Govind, is primary and more into employment-generating heavy capex manufacturing sector, because I think that will have significantly positive cascading effect.
Yeah, so So, let's let's look at, you know, I mean, this part about FDI we can debate. And uh I think you were your question was more about the recent challenge on the rupee.
And I mean, that's what triggered all these conversations. That's why we are
So, you know, there are two things here, right? So, we all know See, today if you step back any economy in the world, in my my experience and talking to so many policy makers is actually more than the capital markets, the barometer is your is your bond market.
Cuz as we know, if you look back in the EU crisis, there were Greece, Portugal, how they are bond rates shot up because people were wanting a huge risk premium, right? On the bonds. So, in my view, the recent measure of MOF along with Reserve Bank is in the right direction because you have started first addressing G-Sec.
Right? You have first started addressing the hopefully the opportunity on FCNR B to bolster your deposit side of forex remittances. And if you are able to stabilize your interest so that is not unattractive also to foreign investors, but at least, you know, it is not perceived to be such a risky issuance from India that you have to pay such high interest rates. And therefore, the measures which have now come in on G-Sec is, I think, the foundation, right? So, to get a little micro
are paying higher on FCNR.
No, no, we are paying well, it's it's too high.
are providing the hedge.
What in my at least my understanding, what we did in 2013 was actually pay higher plus provide hedge. Here, we are only providing a hedge. So, it's it's a good and plus our interest rates are low. But I think the more important
solving a slightly different problem.
No, no, correct, but so that's the start on the G-Sec. What I'm saying to coming to the micro level for instance. We had a 5% withholding tax on interest.
On any securities, any any borrowing, right? Uh external borrowing. Now, that was a sunset of 2023. It was allowed to lapse. So, once again, the suggestion is for G-Sec, you have exempted withholding tax. Good move. You should bring back for non-G-Sec that 5% and now make it more permanent. Don't make it this sunset 2 years, 3 years. These are all band-aid measures because the reality is that on an after-tax basis, when foreign lenders look at their returns, they will have to take into account taxation.
And that is the only reason why it is so important, though it is a tax micro-tax matter. So, that is the second part on the on the debt.
And now coming to the larger part of investment, see, we talked about the non-tax frictions, what more we can do, and there can be a lot more detailing on each sector and how to attract with the global competition, etc. See, if you look at it, what we I alluded to it, what is the investment cycle? It is entry.
It is a life cycle, that is operations, and then exit. All three an investor looks at. I personally think, all said and done on entry, India is now very competitive. Do we tax anybody on entry? Answer is no. Uh do we have the red carpet, as I said, you know, most competitive states know how to now lay out the red carpet. What happens after that is it varies state to state. So, I think entry, it is it's a it's a good
uh generally a a good experience.
And you're saying federal as well as state.
Federal as well as state.
Now, when you come to the life cycle. Now, we are talking of FDI to focus there. One is the non-tax part, which as I said, is state level, and obviously, we can do better. On the taxation side, what do I as a foreign investor, what do I remit back to the home country? I remit back dividends, I remit back interest, or remit back sometimes, you know, fees for technical services, etc. So, just to put it in in a nutshell, we had traditionally a very uh good competitive 10% rate for tax, which is if you see ASEAN countries, is generally the rate. Then we made it 20%. Then we said, "Oh no, you come through a tax treaty, and you will get a lower rate." The best way, in my view, to avoid any kind of day-to-day friction on the operating side is to reinstate the 10%, which means you don't, as a foreign investor, nine out of 10 times you won't need even treaty access. And why I don't want treaty access is because that's where the friction comes. Oh, are you a resident of this country? Oh, where is your tax residency there? Oh, there is subjectivity, somebody will challenge it. That's what irritates foreign investors. So, I'm removing those irritants. And I'm saying, "Okay, just anyway you are taking 10% under a treaty, take 10% under my domestic law." That's what China do. Talking of stability, the Chinese tax system on foreign investments for capital gains, or for withholding taxes on the items I mentioned, is probably stable since the last 20 years. And it's around at 10%. So, that is what one is advocating. Keep it 10, keep it competitive, keep it till your your other two examples, 2047. At least you are giving a clear signal of certainty and stability, and you are avoiding unnecessary potential investigation by the tax office for most of the time for no cogent reasons. So, that's the that's on the on the friction part. And then we come to the exit. As uh Ketan alluded to, you know, some of these provisions on GAAR, etc. See, now again, on exit, I personally think I I gave the China example. If you have a reasonable rate of long-term capital gains tax, right? Uh apart from anyway now treaty, there is hardly any treaty where you get capital gains exemption. So, at least going forward, you can actually make it very, very friction free. To say today is the rate is 12 and 1/2. Hopefully, you can make it competitive, make it 10%. Go back to 10 before 2024. Just pay your 10% tax and be done with it. Take away your 90%. Most countries don't even tax non-residents on capital gains. We are heavy. We need 10%. We are a developing country. As I said, ASEAN countries are at around 10. Remove the need for treaty access. I think India did a great thing by amending
ASEAN countries are charging
10% for portfolio investors. Oh, yes. Oh, yes.
So, that means they are getting taxed on both
Yes, yes, of course.
Of course. ASEAN does. Developed countries don't.
But I'm saying, so you make it a very simple 10% pay it, fill it without filling any forms, pay it, forget it, take the money out. You make remove friction in the system. So, your entry, your life cycle, and your exit are as smooth as possible.
Both of you do a lot of cross-border advisory and transactions and so on. Amongst the let's say two or three leading potential or existing investors that you've spoken to in the last 6 months, what would you say that are have their concerns been or their primary concerns be?
So, as I mentioned, you know, I
And I'll put the same question to you.
Yeah, I think Sudhir talked a lot about tax, but you know, as I was mentioning earlier, you know, I am looking at FDI
much less from an exit standpoint. So, a strategic investor will
be exit? He can.
Do you want him to exit? No. You may want a private You may accept the fact that a private equity will exit.
So, I had a I had a corollary question there. See, are you are you saying that suppose I take two 10-year blocks, 20 2016 to 2026 and 2006 to 2016.
Uh would you say that uh the 6 to 16 composition was different? I mean, less private equity, more strategic.
uh possibly, yes.
Possibly, but but but maybe, yes, but I think I think just the larger issue Govind is you know the exit part. Sudhir mentioned about entry. Yes. During the life cycle and I would like the life cycle to be so to speak forever. It's a mixed thing. It depends. I think there are a variety of challenges. I'm looking at a situation where a large multinational listed is looking to expand is struggling for land. He's struggling. He wants 50-60 acres of land. We are not getting land in one location clean with clean titles. So I think more than tax, more than exit the larger enabling factors we spoke of course logistics. We spoke about industrial clusters. Let's look at another one. You know the cost of power is more here. You know the bureaucracy and red tape. Very interestingly the latest India today is there is a cover story on you know cutting out red tape. You mentioned that Sudhir. So yes. Have things been done on that one? Of course they have been done. Is it accelerating? Yes, somewhat but we are beginning from a very low base. You see you know sometimes I feel and I don't know how I should put this. Ease of doing business unfortunately sometimes the way the bureaucracy approaches it I think that the net result is reducing unease as opposed to as opposed to creating ease. Ease is welcome. Whereas you know okay I am allowing you. I will not make you feel uneasy. I mean it sounds like semantics but it is a real issue in the mind of the foreigner. So I think it's less to do with tax except private equity etc. and FPI of course. I think it is more to do with day-to-day compliances, land, logistics, power, infrastructure. Those are the issues that we really need to
And and you're saying that otherwise they see the market offering the same opportunities it did a decade ago and would want to continue to invest or expand, but they're facing these issues. Otherwise, the market the market opportunity, purchasing power, all of that they're okay with, at least the ones you're talking to.
Also, I just want to make one point. You know what has happened is going the large multinationals have already come. Okay? And of course, we would want them to invest more. So, it's like somebody's there. The problem is the next level get bogged at the prospect of dealing with this complicated country. You see, a a $20 company is different from a $1 company. And if there are 20 $1 companies, no, those kind you know, like say auto component suppliers as opposed to car makers. They are struggling because they don't know how to deal with these complexities. We have to make it much more simpler for them and I think we need to do a lot more on that front, actually.
Correct. So, so they again, the the question being um the there's a three or four clients that you've spoken to in the last 6 months. What would their primary concerns have been from a entry of into India point of view?
So, I think uh I think we'd have to divide between I would say US, China, and the rest of the world. China, we have a policy in any case. And China's priorities are very clear, so let's park that. My personal uh opinion whether it was Trump's first term or the current term and whatever he does or doesn't do, the reality is in private, if you ask businesses large as well as medium small in the US, they are very happy increasing their investments in their home country under Trump regime. Because one thing which Trump has signaled very clearly is that he is pro-business. He is not a big fan of regulations. And uh, you know, all his tax proposals are there in the open. Uh, and he's basically also very clear that the more you bring in here, the more sort of, you know, we will facilitate it. So, the narrative which the political leadership under Trump has created is very clear that we and he has no qualms of, if I may say, you know, going in delegations with CEOs of businesses. Whereas the political signaling in India, unfortunately, is that you should not be seen in the company of business leaders, else you are you know, criticized or whatever. And and then you are sensitive to that criticism in a setup which we have in our country. So, I what I'm trying to say is that first of all, you know, there are black sheep in every every sector of the society. I think India should mature as a political leadership and have consensus on one thing. Anyway, at the state level you are attracting, you want the business leaders to come and visit you and sign your MOUs in your state. So, let's cut out the hypocrisy at the center. And at the moment I'm talking of the current opposition. It it may change whoever is in opposition, but let's let's cut out the hypocrisy. Either you say, you know, what, I don't need any private investment and I won't have it in the states where I govern. Or you accept that, okay, we have to play by the rule book, but we need private investments because country cannot run only on government funding. And that narrative that that you are welcome as a private investor, I think is important. I think in India we have
It also suggests that people do not feel so. The reason I mean, the very fact that you were saying
Because you know, we have we we any any book of retired bureaucrats you read or retired economists, they talk about reforms by stealth in our country. And I think now the thing is that you invite private investments by stealth. That's the signaling. Why? You know, I mean, you need investments of the figures and you have to of course you have to say by the way you have to come in the right way with a proper, you know, what you call equal level playing field. All of that is fine. That's what every country aspires to do. So, I think you're anyway coming to your question. If I am a US based business, my first line of sight is what more can I do in the United States? That's my personal view.
So, we're in a de-globalizing world. So,
one. And no, and and there is a very positive framework and narrative and ecosystem provided in the home country which is US to say, you know, you do more here and you are welcome to do more here regardless of whatever other controversies the regime may be embroiled in. So, that is So, we are up against that, right? In my view and that's a very high hurdle, right? Therefore, for us and I agree with all that Ketan said is for us we have to up the game in on multiple fronts. But, this one I'm emphasizing more because it may be seeming like a soft factor, but when you talk in private to businesses, that is that counts a lot. We Why Why do you want business Why do you want to attract business by stealth? Why can't you have the gumption to say, you know, we want private invest not just at your at your, you know, invest in state melas, but as a matter of policy. So, that's that's an important part. Now, the second important part is, you know, you you said about what they are seeing as, you know, challenges or or India versus the other. My personal view is See, today as a business as a multinational, right? There is a network effect. When I say network effect is, you know, if there is a cluster of manufacturing excellence which say China or Vietnam has, that's a network effect. You can't overturn it overnight, right? So, a boardroom in the west in a western country will say, "Okay, if it is GCCs, you know what first is India. And tell me why it can't be done in India, then I will look elsewhere. And it is a reverse for manufacturing. That they and we have seen exceptions that are in public domain. We have seen Tata Electronics, that is a great exception. We have seen the auto clusters which cater to I think we can have many, many more such unconventional clusters of excellence beyond services. If we apply our mind, have the will, and be upfront, and cut out the hypocrisy, and invite not just FDI, but domestic capital, and say we are favorable to business, we are for business, and we are pro-business.
So, that that is the point that keeps coming up, right? So, why should foreigners invest in domestic capital itself is so shy? What's your sense, Ketan?
No, I think we need both, as you said, you know, I don't think it is one versus the other. But
Not versus as in domestic capital should take the lead, and then foreigners will follow.
very fact, Govind, that domestic capital has been shy. And you know, at every large forum, you're seeing the Commerce Ministry and the Finance Ministry, and indeed even the Prime Minister saying, but it has not happened. Now, some groups it has happened. It has happened say in steel, certain sectors it has happened, but it has to be far more widespread, and I think the reason both for domestic and more for foreign is the entire enabling environment. So, you know, we spoke a lot about many. Let me add a couple, you know, our judicial reform process needs to also pick up. In the High Court, we have 64 lakh cases pending, 64 lakhs. Many of these are smaller cases, but it has clogged up the system. You know, now, for example, in order to address that, there has been a talk about mediation, because you need an alternative dispute resolution as one more enabler. We have the Mediation Act promulgated in 2023. We are now in 26. We're 3 years, but the act is not yet effective. Mediation board has not been set up. So, you know, these kind of delays are also worrying international investors because they say, "God forbid, should I get into some litigation, I do not have a credible alternative dispute resolution mechanism." You know, you look at productivity, for example, you know, our productivity is much lower. I was making some study of the cost of labor in China. It is definitely gone up. So, in that sense, we are better off. But, the problem, Govind, is our productivity. So, you know, I think skilling, for example, you know, so I think we have You know, it's not like one thing, you know, it's 20 different things we'll have to sort of come together. Maybe some will be faster, some will be slower, but one of the biggest issues, and this is a softer one, we have to first acknowledge that we have these problems. I mean, I'm a firm believer that you cannot solve a problem which you do not expressly acknowledge. We have to start acknowledging this. We have made a lot of progress, but we have to say, "Yes, in spite of this progress, we have these constraints, and we are working for it, and these are the concrete steps." We had an industrial policy uh which was a draft of which was circulated 2 years ago. It was I was quite hopeful. Now, just like the mediation act problem, that has not seen the light of day. So, I think we need to work on multiple fronts for manufacturing large strategic FDI, not just private equity, not just secondary, because the impact of that strategic longer term both on employment and on on-ground improvement will be substantial.
Right? Okay, so I think we've taken care of the tangible part, and uh these are I mean, these come up consistently. I mean, the cost of power, the ability to get uh good land, uh title uh title-friendly land, uh and of course, uh accessible with the right amount of land, labor, and other resources at your disposal. So, that's a very important part, particularly for strategic direct investment going into on-ground manufacturing. So, let's look at the soft side as we sum up. What are the What do we need to do on the soft side that you know, sometimes people just feel that oh, India is an exciting country. I want to go and invest. The numbers may actually come later. Whereas, right now, we we are seem to be facing the opposite problem. I mean, 15-20 years ago, people said India is happening. It's buzzing. You know, Davos was It was It was flavor of the season.
I have a nuanced view there, Govind, I I hear you. I think the world has changed. Ketan alluded to it as well that today or you mentioned, right? That tell me in Davos today, is there a buzz about any country? I doubt. Because everybody is looking now at their own It's a pre-World War II or whatever scenario, right? So, I don't think there is a buzz for any country per se. Everybody is trying to find buzz in their own country. So, I think we have to live with the new realities. There's no excitement outside the home country per se. So, that is one part. As a corollary to this, with all the geopolitical upheavals, I think a business, and rightly so, is looking at their own supply chain and, you know, figuring out where they should build the linkages. Where does it make sense? It is If it is rare earth, it can't be India. We know the reasons. If it is oil and gas, it can't be India. We know the reasons. If it is on services at the moment, it is India, hopefully more complex services, as well. If it is auto, yes, it is India. So, where all we can That's the point. Look at the five just stick to Take just five futuristic programs or sectors where India can play a meaningful role. We are talking of green energy. That's great. We are talking of semiconductors. That's great. We are talking of, hopefully, doing more on the value chain on AI and all. So, take those and say that just just focus on those and see how we can be part of the value chain. So, I think to your question, the buzz and the excitement is coming sector-wise. It will come company-wise.
So, you're saying everyone's excited about AI, everyone's excited about semiconductors. You go to Taiwan, go to South Korea.
No, so that that that part I mean I'm not an expert on this. I have many experts are writing more balanced views are coming even from the likes of Mr. Rajan and of course our CEA as well, which I think are very balanced views to say that operationally AI is here to stay. The froth in the capital market, is it permanent? Nobody has that confidence. So, I think we have to wait for that bubble to play out. But yes, India is not part of that excitement. That's part of So, you are right. But again, I'm asking the question, Govind, that even the buzz on AI and the excitement on AI arguably for a Chinese company or investor, it is in China. For a US company, it is in US. It's not that the US is excited about, you know, there is a one or two companies in Korea or Taiwan. Again, it's supply chain dependent. Their excitement is in their own country is all I'm trying to say. So, it is, you know, I think we should in my view not worry about the excitement part of our country.
that argument, then we should really not think so much about FDI at all and maybe only focus on FDI.
all. I'm not saying that. I'm saying the the the the template of uh you know, incredible India with an elephant, you know, arriving in Davos is no longer relevant.
using Davos only figuratively, not literally.
also saying figuratively. I don't know whether an elephant actually went or not in those days. But I am saying that those are very cliché and templated, you know, in a different world order.
We 100% have to uh think about attracting FDI. To me, you know, attracting First of all, the color of the dollar is still green to my knowledge. The print may change, but the color is green.
And the photograph might change.
Yeah, so so so so I think FDI is welcome. We not only welcome, we have to do everything to encourage it. I think the excitement will be in nuts and bolts. The excitement will be in specific sectors and working harder on it. See, it's every It's always like this. When you start in a startup, the excitement is different.
When you have to run a business and scale it up, arguably it is less about excitement, it is more about, you know, making things happen, nuts and bolts, and ensuring that the vision is in place. Then I reached the Viksit Bharat goal in the way I want to. So, I think that's the point one is making.
Okay. Kiran, last word. So, we started by you pointing out a lot of the tangible challenges that we are facing. Also, some of the tax issues, some of the legislations that we should be seeing which would have made doing business, particularly for foreign investors or direct investors, easier, but that's not happened, but it will hopefully. There is obviously a backlog in law which does cause concerns amongst investors because if you your own venture goes into litigation, then when does it come out? So, all of this is is a given. What do we now do or what can we do to address the concerns in the near term because going back to where we started from, we've seen 50 billion dollars go out in terms of portfolio investment. We are on net We are net negative in direct investment right now. And a lot of the investment, as you pointed out, is coming through the private equity route as well. So, which is by nature shorter term.
Yeah.
So, what's the one or two prescriptive points?
No, so I think taking Yeah, so taking a cue from what Sudhir said. No, see, I think as we discussed, you know, there are multiple issues here. But let's assume that the government picks up five or six sectors. So, for example, movie up
So, both of you I think are saying that let let sectors lead the I think so. Lead the way out.
Because, you know, see, because you have too many things going on. So, where will you focus? So, I think let's say we are very much behind in the AI race. Semiconductor, we are, you know, lower down in the value chain. It's one thing to do assembly, but there is a whole host For example, in green energy, in solar, we are ahead. But, I think we pick up four or five sectors and focus on lot on that, especially picking those sectors where the global traction is much higher because that's where See, where have we lost, for example, in AI? We have lost uh attraction. We have possibly missed the bus, but we can catch the next bus provided we focus on four or five sectors and really put lot of focus on making it easier, welcoming them, and tracking it, and making sure things happen on the ground. I think a lot of things will happen if it is sector-led, and you would really make it uh make it welcome make make for international investments welcome because also remember is not only that they bring money, which is, of course, very important. They also bring technology and best practices, and that has a cascading effect all over. I mean, we've seen it when MNCs come. I mean, look at the quality of cars that Indian manufacturers are making. They've gone up substantially. The trend started with international companies making cars in India, right? And things like that.
Okay. Uh Sudhir, so, last point, let me come back to you. So, uh assuming, let's say, we go and focus more on sectors, do you feel that, let's say, if there are two or three of these uh leaders, uh sector leaders, and we put all our effort into it, some of those uh clog points in the pipes will also get cleaned up will it act as a I mean, will there be sufficient gravitational force created?
Uh 100% I think
Because if we if we were to struggle to fix the problems from bottom up, could we then fix it some other way? Is the question.
Look, I mean, it's always, you know, it's half of the glass here, you know, it's half full and half empty, and I always give this if you go back in statistics, uh go in, look at the uh average growth rate of the economy. It doesn't mean, by the way, that we shouldn't do anything. I'm not suggesting that. But if you think about you know, just take late '80s till now. Look at the global and domestic upheavals we have gone through. Just start just visualize that chart. And I don't have to repeat all those events. And at the peak of those events, it it looked as if, you know, I mean, we are doomed, right? That where will we go from here? So, it doesn't mean that uh you know, I think there is enough talent and enough, you know, resilience in the Indian ecosystem to get over it. And therefore, on an average, if my memory serves me right, we are still at about 6% secular average growth rate on GDP, which is not a mean achievement. And that is across regimes and across all kinds of, you know, sort of ideologies, if you like. So, so that's one part of it. The second part, you know, I think doing things differently. I alluded to going maybe we were doing it once upon because of the very contestic space, we are shy and saying, you know, political leaders go to foreign countries, but businesses don't go with them. And I think we should change from a narrative point of view. The third is, maybe time has come, you know, we we allocate responsibilities in the cabinet on very traditional modes of, you know, of course, very important, you know, your home and defense and probably industry, commerce. You know, do we need a minister for FDI? I would say, why not? What is What is the harm? We have enough talent in any government of the day. Focus on that that one person will because we know you have to work with We talked about sectors. Now, I need to work with three ministries at the minimum. So, today the challenge is, I mean, the bureaucrats are doing what they have to do. But if I have a minister who is accountable and responsible and perhaps, you know, in a way it is happening at the PMO level, arguably. But again, you know, there is a bandwidth issue. But, if I have a minister, I'm also signaling to the world that I mean business. I want investments to come into my country, and he's a Here is a very bright, qualified minister who is charged only to attract, and not only attract, but help investments which have come into my country. So, when we talk about, you know, measures, I think we should also And I talked about going out of the template. I think these are some of the things which is not just for the sake of narrative, but actual in substance, uh it would make a difference.
Right. So, and let's hope in the next trip, uh that our Prime Minister goes there is a plane load of CEOs, just like Trump took to China quite recently.
And and that will hopefully set things moving. Thank you both for joining me today.