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Cuttack, Sunday,
October 26, 2014
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III
Foreign Direct Investment in India
N a globalized era, Foreign Direct Investment (FDI) is
important for any country, developed and developing
alike. FDI not only supplements domestic capital deficiency in the host country but also, more importantly,
enables transfer of newer and newer technology as well as
novel, better methods of management including corporate
governance from one country to another so that allocation of
available global resources and their optimal use is accomMANAS R DAS plished. FDI, of course, helps transnational corporations
(TNCs) to eagle spread their operations all over the world.
According to the UNCTAD World Investment Report 2013 (hereafter WIR), in
2013, global FDI inflows rebounded with these rising by 9% over the previous
year to $1.45 trillion. FDI inflows increased in all major economic categories ?
developed, developing and transition. Global FDI stock increased by 9%,
reaching $25.5 trillion. WIR projects that global FDI flows could steadily rise
to $1.60 trillion in 2014, $1.75 trillion in 2015 and $1.85 trillion in 2016.
FDI in India
In India, foreign investment was introduced in 1991 under the Foreign
Exchange Management Act, driven by then FM Dr. Manmohan Singh. In
our country, FDI policies and procedures are governed jointly by the
Central Government and RBI. According to Department of Industrial
Policy and Promotion (DIPP), 'FDI' means "investment by non-resident
entity/person resident outside India in the capital of an Indian company
under Schedule 1 of Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations, 2000." As stated
at the outset, India, through FDI, invites not only global capital but also
technology, skill and management to help achieve higher economic
growth. FDI, as distinguished from foreign institutional investment, represents foreign investors' 'rather permanent' interest in our economy.
There are two entry routes for FDI in India: (a) Automatic Route under
which the foreign investor or the Indian company does not require any
approval from RBI or the Central Government for the investment and (b)
Government Route under which the foreign investor or the Indian company should obtain prior approval of the Central Government (Foreign
Investment Promotion Board - FIPB), Department of Economic Affairs,
Ministry of Finance or DIPP, as the case may be for the investment.
Factsheet
Chart 1 depicts the trend of FDI in India from 2000-01 to 2013-14. The
latest data available are up to the month of August of 2014-15 financial year.
During April-August 2014, the inflows reached over $14,000 million.
I
India (Chart 2). Most of the FDI inflows in India comes from Mauritius
because of the tax benefits the foreign investors enjoy in routing their
investment through this country. This tax advantage sources from the comprehensive Double Taxation Avoidance Agreements that India has with 88
countries including Mauritius.
Source: Based on DIPP statistics. #Received through FIPB/SIA+RBI's Automatic
Route+Acquisition of existing shares. SIA - Secretariat of Industrial Assistance (in DIPP)
Sectoral Recipients
^Only equity inflows. @Includes Financial, Banking, Insurance,
Non-Financial/Business Outsourcing, R&D, Courier, Tech. Testing
and Analysis. #Townships, housing, built-up Infrastructure. $ Other
than fertilizers. Source: Based on DIPP statistics.
Source: Based on RBI
Repatriation/Disinvestment
data.
#Gross
Inflows/Gross
Investments-
In absolute terms, FDI in India was below $5,000 million in 2000-01 but
slowly moved up after 2003-04. It picked up speed from 2006-07 onwards
following the opening up of single-brand retail in 2006 and peaked in 200809. However, thereafter it was on a downhill which was generally in tandem with the global trend. The onset of slowdown could be attributed to
the financial imbroglio that started in 2008 leading to the 'Great Recession'.
It showed an upward movement in 2013-14. However, the opening up of
multi-brand retail in 2012 did not generate the expected results. The ratio of
FDI to GDP was in line with the above-mentioned trend observed in respect
of absolute amount of FDI inflows.
Sources of FDI
The top six countries which include Mauritius, Singapore, UK, Japan,
Netherlands and the US supplied over three-fourths of the total FDI to
VIVEK PATTANAYAK
ISCAL deficit, current account gap, adverse balance of trade, uncertainty of foreign exchange
reserves, risk of the Indian rupee tumbling down
vis-a-vis dollar, gargantuan non-performing assets
(NPA) in the banking sector, high rate of interest, persistent inflation, recent out flow of foreign institutional
finance(FII), no visible flow of foreign direct investment(FDI) and cooling down of stock market with a
forecast of another round of depression in Europe and
Japan in the background of weak monsoon in the
beginning of season, destructive floods in Odisha, and
Assam, unprecedented deluge in J&K, catastrophic
'Hudhud' in Andhra Pradesh have created seriousness
which cannot be easily ignored by policy makers.
At the same time, jobs must have to be created for
young people on a sustained basis so that they get a reasonable standard of living without that there is genuine
risk of a demographic dividend that creates demand can
degenerate into disaster with disappearance of demand
which attracts the global investors to India. Rising young
population, urban or rural, conscious of their political,
social and economic rights with rapid expansion of information communication technology and clamour for
increasing transparency in public domain are impatiently looking for tangible economic result.
In rural India, landless labour, forest dwellers, submarginal and marginal farmers, and in urban India in
Metros, cities, and towns, unorganized labour like
coolies, safai karmacharis, pherrywallas, rickshaw
pullers, domestic workers living in shanties, and pavement dwellers need food grains, fruits, vegetables, dairy
and animal products at an affordable price. The young
people who have completed schools, colleges, university, holders of certificates of skill, diploma engineers,
degree engineers and management graduates need jobs
commensurate with their qualification and skill so that
they get a decent income for a modern living.
The call given to big domestic corporate houses, the
American business and the Japanese private behemoths to
join the "Make in India" programme will take its own time
F
The services sector received the highest amount of FDI inflows constituting 18%, which was followed, in succession, by construction and telecom
sectors. These sectors, combined with computer industry, and drugs and
pharmaceuticals, accounted for 47% of the total FDI inflows.
State-wise Destinations
DIPP data revealed that of the cumulative total (April 2000 to July 2014),
the highest amount of FDI (equity capital component only) went to
Maharashtra (including Dadra & Nagar Haveli and Daman & Diu) - 30%.
This was followed by Delhi (including part of UP and Haryana) - 19%, Tamil
Nadu (including Puducherry) and Karnataka - 6% each, Gujarat and Andhra
Pradesh - 4% each and West Bengal (including Sikkim, Andaman & Nicobar
Islands) - 1%. Together, these states accounted for 70% of the total.
Aggregating these States/UTs into geographical regions, it can be seen that
the western and southern regions absorbed the most of FDI inflows in India.
This could be directly linked to their better infrastructure facilities and accommodative policies of the State Governments towards FDI in these regions.
Odisha's share was a negligible 0.2%.
Concluding Remarks
According to WIR, FDI flows to developing economies will remain at a
high level in the coming years, and South Asia will be the topmost host.
There is no gainsaying that India can be an attractive destination for foreign direct investors. According to WIR, India figures among the top 20
host economies for FDI inflows in 2012 and 2013, along with several developed countries of Europe, besides US. According to a UNCTAD survey of
164 TNCs, (reference: WIR) India is ranked the 4th topmost destination for
FDI for 2014-16 (the rank in 2013 was 3rd). China is No.1 followed by the
US and Indonesia, in succession. Another statistic that speaks volumes for
India's potential as FDI recipient is that its net FDI/GDP ratio is one of the
lowest among the emerging market developing economies. According to
World Bank data, the net FDI/GDP ratio for India at 1.5% in 2013 was the
lowest among the BRICS countries, for instance. (Net FDI=Direct investment to the country-Direct investment by the country)
Apart from being a peaceful democracy and its domestic market being
vast, India is endowed with enough potential to be developed as an
export hub. This has been well demonstrated, though in limited scale in
limited sectors. In India, factors of production, especially land and labour
are relatively cheap and the incidence of young and English speaking
population is high.
Moreover, the redeeming features today are (a) political stability and (b)
gradually improving macroeconomic conditions leading to a more congenial atmosphere for business enterprises. Nevertheless, certain 'institutional
enablers' need to be in place, rather expeditiously, in consonance with the
fast changing global environment.
An overhaul of policies in a large number of areas encompassing taxation, land, labour and environmental laws, natural resources, bankruptcy
and closure, and financial markets is undoubtedly imperative. Many of
these laws have been long anachronistic. The canons of the revamped laws
should be as follows: these should be simple, transparent, fairly stable, easily implementable and enforceable, less prone to dispute, and last but not
least devoid of bureaucratic delays and cobwebs. All these are applicable at
both Centre and State levels. Working in a federal structure like ours, the
Central Government has to take the State Governments into confidence in
many aspects and the latter should be equally responsive.
The Central Government has initiated quick actions in these directions.
However, all-out efforts should be made to scale up our global ranking
meaningfully in 'competitiveness' and 'ease of doing business.' [World
Economic Forum's Global Competitiveness Report 2014-15 ranks India as
71st (out of 144 economies) and World Bank's Ease of Doing Business
Report 2014 ranks India as 134th (out of 189 economies)]. A time limit
should be defined for accomplishing the desired benchmarks. (The reader
may see my article Global Competitiveness Report 2014-15 and India which
appeared in this paper's September 14, 2014 edition.)
However, it must be underlined that all these should be done without
compromising, at all, citizens' interests and above all, our sovereignty
and dignity.
As evidenced by Chart 3, the services sector has been the topmost recipient of FDI and financial services constitute a major segment of the services sector. It is felt that the insurance sector, which is capital-starved in India
and therefore unable to attain desired penetration, may need FDI, but it has
to be carefully weighed whether the banking sector would also need further FDI. If our banks are restructured in terms of enabling these to recover bad debts, relaxing suitably and in a calibrated manner the government
ownership, revamping their corporate governance rules, revaluing their
fixed assets and invigorating the manpower, additional FDI can be
eschewed at least in the near-term. Some other sectors that need FDI
include energy, higher education, high-end research, transportation and
logistics, and urban infrastructure (including sanitation and waste management techniques). It is heartening to note that an Indian business conglomerate has tied up with a US company to explore shale gas.
People participation is very crucial. There exist a lot of misconceptions
among the people in various parts of our country about the role of FDI in
our development process. Much of these misconceptions have emerged
from ill-conceived, mis-informed and myopic notions about FDI. This
needs to be wiped away through dissemination of proper information
about the 'good, bad and ugly' of FDI, predominantly through local campaigns by relative government agencies, aided by progressive NGOs.
Above all, the focus of our FDI strategy should be on acquiring the
'global' techniques and metamorphosing these to meet the 'local' development needs in a 'sustainable' manner. Perhaps, therefore, for PM Modi 'FDI'
stands for 'First Develop India'.
Adverse Economic
Environment
to gather momentum.
Land acquisition, environmental and forest clearances, mining leases, and
procedures of foreign
investment have their own
complexities. Even if simplified, there is no guarantee against tortuous public
interest litigation and civil
society activism.
In this scenario the
need of the time is to
invigorate micro agro,
small and medium enterprises which make significant contribution to GDP,
create robust employment
opportunity, and contribute handsomely to foreign exchange reserves.
This sector requires minimum capital but gives maximum return. The sector at
present suffers from want of credit and equity capital and
handholding by the State promotional bodies.
Over several years, notwithstanding call for a second green revolution concrete initiatives have not been
taken to augment agricultural productivity by resorting
to diversification of cropping pattern, dry-land farming,
newer ways of irrigation, scientific water management,
resolving the controversy on genetically modified crop,
providing agricultural
credit and input with
efficiency, updating of
land records and reviewing of land tenure and
land reform system.
Mere increase in agricultural production will
not suffice unless commodities are available to
the consumers of weaker
section of the society at
reasonable price and producers get the economic
return to justify investment. Rural road network, warehousing facilities, cold storages and
efficient logistics and supply chain both at micro
and macro level whether
through public or private
investment or through both will create job opportunities
along with promotion of agro based industries.
Service sector in India has shown growth consistently for several years but it can further expand if emphasis is laid on tourism and hospitality sector. Flow of
international tourist traffic needs expansion in the
domain of civil aviation through more international
flights with domestic connections to tourist destinations
and newer airports. Whether national carriers are capa-
The author, a former senior economist
of a commercial bank, can be reached at: [email protected]
ble of handling this potential growth needs a dispassionate review. There should be openness in mind to
give access to foreign carriers even to non-metro cities.
In addition, construction of new airports, whether in
private sector or in public sector or under the PPP
mode, will generate employment and create industrial
activities. One area of tourism which has expanded is
domestic tourism. It now should include rural tourism.
What is real cause of economic ailment and absence
of vibrancy in the economy?
First, the bureaucracy is demoralized. Decision-making has been paralysed. Fear psychosis has malignantly
pervaded public sector institutions including the banks
creating a foreboding environment. Second, politics has
become confrontational creating lack of cohesion
between Centre and States when they have different
political complexion. Third, in last many years the doctrine of separation of power has created a hydra-headed
chimera the executive, legislature and judiciary as traditional pillars of the governance have now to share influence with CAG, CIC, CVC, Election Commission and
many other constitutional and statutory bodies. The
fourth estate both print and electronic media and civil
society have emerged as power centers which can have
strong bearing on decision-making process in the governing structure. This has brought into play multiple
centres of influence giving the scope for confusion as to
what is right and what is final. Fourth, private sector
which propelled rapid economic growth since liberalization is seen as crony capitalism. Every lapse is seen as
scam. Every scam creates a doomsday scenario.
As a consequence, there is no risk appetite, no animal spirit, lurking fear of failure and scourge of possible scandal, paralysis of decision making and multitude
centres of influence.
Notwithstanding bleak economic sentiment, the
financial sector is flushing with funds which now go for
long term bank deposits, trading of blue chips, acquisition of real estate and buying of gold and silver but hardly towards new and innovative industrial ventures.
The author, a former bureaucrat, may be reached at:
[email protected]