Other side of FDI

In yet another epochal[e-pu-ku(important,महत्वपूर्ण)] move to attract foreign direct investment (FDI), the government has opened the door wider in several major sectors of the Indian economy.
The announcement made on November 10 should, therefore, be seen as another attempt by the Indian government to attract sizeable volumes of foreign capital by easing the procedures, which, in its view, were limiting these inflows. But as it makes its best efforts to catch the attention of foreign investors, the government may also like to consider the global realities and its own experience in this regard, since the country turned “investor-friendly” some two decades back.

First, globally, FDI flows of all hues have not been growing, especially from the developed countries. The reality is that the developed countries are reaping the benefits of their past investments. Real outflows from them are far less than what the aggregates[ag-ri-gut(total,कुल)] suggest. Reinvested earnings (profits generated and retained in host countries) are bolstering[bówl-stu(strengthen,मजबूत)] the reported FDI flows.

Another important factor is the costs associated with FDI, especially the servicing burden and crowding out of domestic investment.However, experience shows that while developing countries have not been able to acquire the technologies they need, they have had to make a variety of payments “for use of intellectual property”. In fact, for India, the servicing burden of FDI in terms of repatriations[ree,pey-tree'ey-shun(return to country,देश वापसी)], dividend payments and payments for use of intellectual property is now showing up prominently. About half of the inflows into India during the past six years were balanced by outflows. What are reported as payments for technology could, in fact, be disguised dividends which deny the exchequer[iks'che-ku(fund of the government,राजकोष)] and the public shareholders their due. Foreign companies which did not pay dividends for many years are happily sending remittances[ri'mi-t(u)n(t)s(sent money,भेजी हुई रकम)] abroad on account of royalty payments, including those for the use proprietary brand names.

Expand sectoral caps

One of the reasons the government gives for enhancing sectoral caps is that of ‘fragmented ownership issues’. The reality is somewhat different. During the decade 2004-05 to 2013-14, foreign investors in the manufacturing sector have consolidated[kun'só-li,dey-tid(bolster)] their position: a majority of the companies which received what may be termed as ‘real FDI’ (as distinct from the funds being brought by NRIs, private equity funds, and so on) are either wholly foreign-owned or have sole control. Further, a majority of such investments is utilised in displacing domestic entrepreneurs/investors instead of adding to production capabilities. India has lost many home-grown industry leaders and potential winners through takeovers by foreign investors. The domination by foreign investors backed by huge financial resources at their disposal is proving to be inimical[i'ni-mi-ku(harmful,हानिकारक)] to the emergence and survival of domestic enterprises. FDI should add to the national productive capacities instead of becoming a threat to existing/emerging alternatives due to their superior financial strength.

There was a special mention in the new policy announcement about the construction sector and the need to build 50 million houses for poor. A vast majority of investment in this sector is by private equity investors and Indians bringing back (black) money in one form or the other. The forms of investment that the construction sector has attracted raised several pertinent[pur-ti-nunt(relevant,उपयुक्त)] questions. Will private equity investors, who seek multiple returns, and returning Indians invest in housing for the poor, or in townships for the rich and the upper middle class and commercial complexes? When the private equity investors encash their investments, what would be the net outflow? In this context, it should be pointed out that disinvestments/repatriations were more than a fourth of the total equity inflows during 2009-10 to 2014-15.

Indian subsidiaries of foreign companies in the manufacturing sector run a huge deficit on trade account. The data released by the Reserve Bank of India shows that there is large dependence on imported inputs. Together with other payments and expenditure on other heads, the overall effect on the country’s balance of payments could be substantial. This phenomenon could have significant implications for the ‘Make in India’ programme. Many Indian entrepreneurs have now turned into part-traders of imported consumer durables. Without changing the overall policy landscape and attitude, India cannot expect to make a success of ‘Make in India’ with the help of FDI alone. The new measures in no way address this vital issue. FDI cannot be a substitute for domestic resource mobilisation, and FDI policy cannot be a substitute for prudent[proo-d(u)nt(wise,sensible,दूरदर्शी)] domestic policies.

Policymakers need to take cognisance[kóg-ni-zun(t)s(awareness,जागरूकता)] of the fact that it is domestic investment which has provided an overwhelmingly large share of India’s capital formation and has, therefore, been instrumental in pushing up the country’s growth rates. India should be careful not to create two classes of investors wherein the foreign investors, including returning Indians, are given disproportionate advantages.

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