Sunday Anchor

Wrong signals as Make in India gets under way

For the Modi government, it is a big embarrassment. The impending closure of the Nokia plant at Sriperumbudur, near Chennai, on November 1 has come at the wrong time. For, the shutdown was announced close on the heels of a high-profile “Make-in-India” campaign launched by Prime Minister Narendra Modi. Nokia’s decision may well have a wider ramification for Foreign Direct Investment (FDI).

Not surprisingly, questions have now been raised about the efficacy of the high-decibel campaign to woo multinationals to set up shop in India.

Tax disputes

The Nokia episode and unresolved tax disputes related to companies such as Vodafone, IBM and Shell (which, too, find operations and plans for global deals disrupted by protracted taxation disputes involving their Indian subsidiaries) have put a big question mark over Mr. Modi’s “Make-in-India” pitch.

Nokia had claimed a service tax exemption for software exports. The tax authorities, however, termed it illegal as Nokia exported software developed in India to Finland and some of it was used in the overall software packages that were later sent to India to be loaded on phones sold domestically. The differences in interpretation of applicability of service tax in this instance had let to a prolonged legal battle between Nokia and the Centre, which ultimately led to an ugly stand-off. The State government’s tax demand aggravated Nokia’s misery and conspired to hasten the shutdown. The attitude of the governments at the Centre and in the State in this instance was in sharp contrast to those of the authorities in China, who go head over heels to woo FDI.

The resultant legal battle and court orders have further compounded the misery of Indian workers. So much so, Nokia could not transfer the Sriperumbudur facility to Microsoft as part of the global deal to sell its devices business. The survival of the unit depended on the willingness of a “benign Microsoft” to place order on Nokia India to supply handsets. Once Microsoft withdrew this offer, Nokia had no option but to bring the curtains down on its India facility. Much before this, Nokia gave a golden handshake to its workmen. Many of them had little option but to accept it hesitatingly.

The tax disputes have only hurt India image in the world of commerce. There are two components to the disputes. One involves a service tax claim of $375 million by the Centre. And the other concerns a $400-million claim by the Tamil Nadu government on Nokia for allegedly selling phones made at the plant in the domestic market (rather than exporting them) without paying the duty.

Could the jobs have been saved? Perhaps. The tax disputes and resultant legal rows have ensured that the plant could not be transferred to Microsoft. Also, they have effectively prevented the sale of the unit. Sources indicated that HTC was indeed eying the unit. For companies such as Lenovo, Motorola and the like, the unit could have been a nice fit, and the job loss could have been prevented.

Global perspective

No corporate is going to make in India if it is not going to make money. Merely asking companies to set shop in India will not see them rushing in. What is needed is a friendly, transparent and comfortable ecosystem. The rules of the game must be clear and closed to tinkering. More often than not, rules are framed to reap short-term benefits. The inability to “think long” may prove a major stumbling block to the “Make in India” campaign in attracting FDI.

The Nokia story must not be seen from a micro prism alone. To decipher its predicament, one must look at it from a global perspective. For one, it was done in by the hardware vs software game. For another, the company lost the smartphone war. If its failure to gauge the market mood and inability to develop quickly a supporting ecosystem pulled it into the quicksand of competition, the unanticipated tax disputes only hastened the closure of its plant.

The Nokia fiasco has added a new dimension to the “Make in India” campaign. In the evolving global village, nations need to put in place a robust policy framework to address issues arising out of mergers and acquisitions internationally. The operational environment should be simpler. Absence of an enabling ecosystem can cause disruptions in the surrounding social environment. Nokia is at the epicentre of trouble at the moment. This is bound to spread to its dependent units around Sriperumbudur. With the unit frozen in a legal mess, trouble is waiting to enter those units.

The Nokia mess calls for a holistic approach on a fast-track basis if Mr. Modi’s idea of making India a global hub for manufacturing were not to remain a dream.

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Printable version | May 19, 2022 9:03:02 am |