Tax Incentives not enough for India to compete in global market

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India wants to attract “mega investments” in manufacturing with tax incentives, but it will need more than that to compete with Southeast Asian peers who are gaining from a shift in global supply chains.

Finance Minister Nirmala Sitharaman outlined plans in her budget last week to offer income and indirect tax breaks to global technology companies to set up factories in India to make everything from semiconductors to solar panels. The government also wants to organize a global summit to attract investors.

As Asia’s third-largest economy, India lags behind Southeast Asian peers when it comes to winning over investors. Foreign direct investment into India was 1.5% of gross domestic product in 2017, according to the World Bank, compared with 3% in Malaysia and 6.3% in Vietnam.

Part of the reason is that it’s harder to open and run a business in India than in Southeast Asia, according to the World Bank’s ease of doing business index. For example in Vietnam, which has an economy a 10th the size of India’s, it’s easier to start a business, register a property and enforce a contract, according to the index.

India is missing out on global value chains because of its inadequate transport infrastructure, land and labour regulations and tax structure, said Pravin Krishna, a professor of International Economics and Business at Johns Hopkins University in Washington.

“Tax incentives may indeed help a bit,” he said before the budget. “The problem of improving investment climate is a much larger one.”

India wants to now offer incentives similar to Vietnam to gain from supply chain disruptions, with the government identifying industries including lithium battery technology, electric vehicles and consumer electronics for tax breaks.

So far, Modi government has struggled to ease archaic land and labour laws that make it difficult for companies to start and expand. The government is now proposing to combine multiple labour laws into four broad codes with the aim to reduce disputes, Sitharaman said.

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