Business, Economy, Finances, Banking & InsuranceInterviewsNation


In response to our article on the state of economy in India, a very good friend of mine and an economist by training but a professional forester said that our economy is robust in the light of rising trend in FDI inflow ever since the government led by Honorable Narendra Modi ji came into being and rest of the parameters are concocted and fake.

My friends, I shall like to tell you that India opened up its economy to foreign direct investment (FDI) with the 1991 liberalization regime and has aggressively pursued it since then. In the month of August 2019, the government of India liberalized it further and simplified the FDI policy “to provide ease of doing business in the country, leading to larger FDI inflows and thereby contributing to the growth of investment, income, and employment”. We have not been able to find and see some of the reports which are mentioned as below:

1. The 2008 Report of the Prime Minister’s Group,
2. The discussion paper on Industrial Policy-2017 and
3. Strategies and FDI policy-Review paper (2018) by Niti Aayog.

Therefore, there are many issues that remained unattended all these years is an assessment of what has actually been achieved beyond the capital inflows and repeated pleas of various government reports. Going by the official data, the gross FDI inflows have been rising in absolute numbers – from $4,029 million or Rs 17,557 crore in 2000-01 to $64,375 million or Rs 449,616.6 crore in 2018-19. The equity component of FDI has also been rising from $2,463 million or Rs 10,733 crore in 2000-01 to $ 44,366 million or Rs 309,867 crore in 2018-19. However, in terms of annual growth in inflows or as a percentage of gross fixed capital formation (GFCF), the FDI inflows have come down significantly post-2008-09, contrary to the government’s claim that the Make in India initiative of 2014 gave it an “unprecedented” boost.

The annual growth in gross FDI and FDI equity inflows has fallen into single digits since 2016-17 with the latter registering negative growth in 2018-19. The gross FDI as a percentage of GFCF has fallen from a high of 32.9% in 2008-09 to 8.1% in 2018-19. Similarly, the FDI equity came down from 24.6% to 5.6% during the same period. Another key trend is seen in the repatriation and reinvested earnings (earnings that are ploughed back into the Indian economy). Both show negative trends, indicating more capital is flowing out, diluting the FDI’s potential benefit to the Indian economy.

Repatriation of earnings, which used to be very low until 2008-09, rose to 17.9% of the FDI equity inflows in 2009-10 and reached 48% in 2017-18. This shows that more and more capital is being taken out of the economy.

Simultaneously, the reinvested earnings (earnings that are reinvested), which were high in the beginning – more than 60% of FDI equity inflows in 2002-03 and 2003-04 – went down to 28% in 2017-18. This indicates more profits are being taken out, which could have benefited the Indian economy in the long run. The discussion paper on Industrial Policy-2017 had pointed out that “benefits of retaining investments and accessing technology have not been harnessed to the extent possible”.

Seeking FDI has always been more than just about foreign capital. The Statement of Industrial Policy of 1991 stated that the objectives of opening the economy to FDI were to “bring attendant advantages of technology transfer, marketing expertise, the introduction of modern managerial techniques and new possibilities for promotion of exports”. The last FDI policy statement, Consolidated FDI Policy Circular of 2017, also made it clear that the FDI was also about supplementing technology and skills to propel economic growth. The difficulty and irony of the country in general and trained economists in particular that they believe what governments want them to believe regardless of truth in it.

The Government of India has had no answers or interest in providing such information. The emphasis has always been on the quantity of capital inflow. We should know that what Prof KS Chalapati Rao of the Institute for Studies in Industrial Development, who has been studying FDI for decades says: “There has been no mechanism to tell what the FDI is doing in this country, especially in regards to technology transfer and employment”. The 2008 report of the Prime Minister’s Group (V Krishnamurthy) said there was “little or no emphasis” on technology transfer or whether the kind of technologies being brought in was “appropriate or not”. Quite often, it said, the technologies bought in were not the state-of-the-art technologies but at least one or two generations older. Therefore, it asked for “a relook at our FDI policy in terms of the technological benefits the country needs to derive”. In 2017, the ‘Industrial Policy-2017’ document of the Department of Industrial Policy & Promotion (DIPP) concluded that “FDI policy requires a review to ensure that it facilitates greater technology transfer, leverages strategic linkages and innovation”.

The Niti Aayog’s 2018 report, Strategy for New India@75, too recommended that “for India to become the world’s workshop, we should encourage further FDI in manufacturing, particularly when it is supported with buybacks and export orders”. No such review has taken place yet. Another aspect that has received inadequate attention is the inflow of FDI equity into manufacturing. Analysis of data (for years 2000 to 2019) shows a larger share of the FDI equity (gross FDI includes equity, re-invested earnings, and other capital) has gone into services (mainly financial services, software, telecommunication, construction, and trading, etc.) than manufacturing (mainly automobiles, chemicals, drugs and pharmaceuticals, etc.).While the services sector attracted 65.4% of the total, the manufacturing sector got a mere 34%.

Half of the FDI equity into manufacturing, it seems, goes into acquisitions of existing businesses, rather than creating new capacities in the economy. I hope I could be able to make you understand that there is a relationship in FDI and economy but other parameters should also be explained appropriately.

By Uma Shanker Singh IFS PHD
डिस्क्लेमर (अस्वीकरण):इस आलेख में व्यक्त किए गए विचार लेखक के निजी विचार हैं. इस आलेख में दी गई किसी भी सूचना की सटीकता, संपूर्णता, व्यावहारिकता अथवा सच्चाई के प्रति उत्तरदायी नहीं है. इस आलेख में सभी सूचनाएं ज्यों की त्यों प्रस्तुत की गई हैं. इस आलेख में दी गई कोई भी सूचना अथवा तथ्य अथवा व्यक्त किए गए विचार के नहीं हैं, तथा उनके लिए किसी भी प्रकार से उत्तरदायी नहीं है..

Show More

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button