Every day seems to bear news of India’s success as a pre-eminent tech-savvy nation. Other than India’s homegrown UPI, however, none of these can be ascribed to indigenous traffics and innovation. One such toast of the town is Apple, which has clocked over $10 bn worth of iPhone exports from India this year, up 75% from H1 FY25.
To add to the euphoria, Foxconn Interconnect Technology, Hyderabad, a wholly-owned subsidiary of the Taiwanese contract manufacturer for Apple products, plans to invest nearly ₹4,800 cr to double monthly AirPods production to service US, European and Indian demand. Then there’s Google’s announcement that it will invest $10 bn to establish a 1 GW capacity data centre cluster in Visakhapatnam, projected to be Asia’s largest when it becomes operational in 2028.
Also, Elon Musk’s Starlink has applied for 600 Gbps of capacity for its 4,408 low-Earth-orbit (LEO) satellite service, which will facilitate gateway stations in 9 Indian cities. Farther upstream, Sify Technologies is being celebrated for having been chosen by Meta as its preferred landing partner for Project Waterworth, a $10 bn undersea cable connecting the US to Brazil, South Africa and India.
These opportunities don’t come without concessions, like PLIs and proposed tax amendments provided to Apple’s contract manufacturers, tax exemptions for data centres in Tier-3 cities, and indemnification for AI firms against copyright infringement while using personal data to train their models. But they also promise to boost capital and employment. Along with all the other chatter centred on intended AI partnerships and investments, it’s little wonder that India’s future dazzles citizen and foreigner alike.
The assumption that FDI and foreign direct participation (FDP) are key to a successful developing nation’s playbook has its origin in the 1980s, when the benefits of globalisation – including free capital inflows, deregulated markets, tariff reduction and privatisation – were aggressively pushed by institutions like IMF and World Bank. One European trade representative even stated in 1995 that FDI and FDP were finally being seen for what they were: a source of capital that had no country, ‘a contribution to a healthy external balance, a basis for increased productivity, additional employment, effective competition and rational production’.
For all that, the truth is more nuanced. In Nigeria, for instance, global corporations have exploited its vast petroleum reserves for years. But the country has been unable to develop its own refineries and allied industries. Similarly, in Mexico, auto plants produce vehicles for export, while local manufacturers are relegated to making low-value ancillaries and components. On the other hand, countries like China, South Korea and Taiwan were able to build both mid-tier and hi-tech industries, and even indigenous MNCs of their own.
A large part of this success may be attributed to the way in which they kept foreign capital and participation within defined guard rails and used them to pursue clear national priorities. By forcing JVs on foreign entrants, insisting on IP access, mandating use of local suppliers where possible and actively supporting domestic corporations, these Asian nations were able to promote global champions and challengers.
Today, India is at a new crossroads. But the wisdom of carefully navigating FDI and FDP remains the same. This is critical because India suffers from structural weaknesses that include unequal education and skill level of its workforce, preponderance of SMEs, and narrow industry diversification at scale. As a result, foreign investments and units could simply replace domestic investment and industry rather than augmenting them.
In such a situation, as with many Latin American nations including Brazil and Argentina, foreign players can, in the near term, decimate less efficient local companies, consume disproportionate resources, and create a low-skill and mid-tech equilibrium that will reinforce existing comparative advantages without future upside like textiles, assembly work, IT services, etc.
This will not advance India’s high-end manufacturing and service development ambitions. In the long term, this could be even worse. Conducting empirical research with data spanning four decades, G K Martins showed that countries with higher foreign ownership in 1980 suffered significantly reduced income growth – up to 40% lower – by 2019.
Ultimately, GoI should be mindful that becoming the other factory of the world through assembly plants, landing stations and GCCs is a commercial target, not an economic vision. To achieve its true potential, India will need to invest heavily in building its own capabilities, while judiciously enabling foreign ownership through JVs and mandatory technology transfer.
Otherwise, when the music stops playing and the applause ends, the country may find itself in an irreversible ownership, capability and income trap of its own devising.
The writer is founder-CEO,ALSOWISE Content Solutions
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