Monday, July 15, 2024

The Failure of Modinomics in Attracting Foreign Investment

Investment Shyness: Understanding the Weak Private Investment in Modinomics

Title: Understanding the Weak Private Investment Climate in India under Modinomics

In recent years, the Indian government has implemented various measures to encourage private investment in the country, particularly through initiatives like Modinomics aimed at boosting manufacturing and attracting global investors. However, despite these efforts, private investment remains weak, with both foreign direct investment (FDI) and overall investment showing a decline.

The crux of the issue lies in the government’s approach to understanding returns but being cavalier about risk. While measures like infrastructure development, tax cuts, and production subsidies have been introduced to increase returns on investment, not enough attention has been paid to addressing the inherent risks associated with investing in India, especially in the manufacturing sector.

Unlike service firms where risks can be managed through scalability, manufacturing investments are large, indivisible, and irreversible. This makes it crucial for investors to carefully evaluate the risks before committing to significant projects.

During Narendra Modi’s first term, efforts were made to restore macroeconomic stability and reduce risks for banks through measures like the Insolvency and Bankruptcy Code (IBC). However, in the second term, there was a lack of focus on risk mitigation, leading to increased investor apprehensions.

Three main types of risks have emerged under Modinomics that are deterring private investment. These include ‘national champions risk’, coercive state action like aggressive tax collection, and supply chain risks due to tariff increases and product bans. These factors have contributed to a challenging investment climate in the country.

To reassure investors and improve the investment climate, the government needs to address these risks effectively. Actions like signing free trade agreements and ensuring consistent policies can help mitigate supply chain risks. Additionally, the government should focus on building a stable and conducive environment for investment by reducing uncertainties and coercive actions.

Overall, while policy actions can enhance returns on investment, addressing risks is crucial to attracting private investment in India. Modinomics must evolve to not only focus on increasing returns but also on mitigating risks to create a more investor-friendly environment. Failure to do so could continue to hamper private investment in the country.

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