No need to get too anxious about FDI: A Viewpoint

Prof. Gurpartap Singh

No need to get too anxious about FDI: A Viewpoint

Prof. Gurpartap Singh1
Gian Jyoti Institute of Management & Technology, Mohali, Punjab, India
prof.gurpartap.singh@gmail.com

ABSTRACT

There is no doubt that Foreign Direct Investment (FDI) plays an important role in partly
bridging the gap between domestic savings and the needed investment. That is why
developing countries like India give importance to getting more and more of FDI. In India,
after the economic liberalisation in 1991, FDI has gradually increased and currently the
country is a leading destination for foreign direct investment. Successive governments have
tried to create conditions to attract more and more of FDI. Even now, the central government
is giving lot of attention to efforts to attract more FDI. However, this author feels that though
it is important to get more FDI, we need not be overly worried about it. FDI alone cannot
become the engine for economic development. In this paper, this argument is presented by
analysing the changes that have happened in connection with FDI and the reasons why we
should not be too anxious about FDI.

Key words: developing countries, economic development, Foreign Direct Investment

1. Introduction

In any economy, foreign investment plays an important role in supplementing the low level of
domestic investment. Same happened in India also after the economic liberalisation in 1991.
FDI was instrumental in the development of several industries and has been an integral part
of Indias growth story since then. After 1991, the country has shown regular high growth
rate in almost all of the macroeconomic indicators. Especially, in the period 2001-10, the
country saw fairly high GDP growth averaging around 8.5 - 9 percent, increase in domestic
savings, increase in investment levels and increase in foreign capital inflows.

The main reasons for increase in FDI in India and other developing countries are the trade
liberalization measures, technological changes, favourable investment regimes and
privatisation and deregulation of markets. One of the most important indicators of economic
growth in a country is the rate of capital formation. At macro level, the foreign investment,
especially FDI, serves as non-debt source of external finance and at the micro level it helps to
increase production, improve technology and skills, and creates new jobs.

Over the years, several additional measures have been taken by the successive governments
to attract more and more of FDI. All these measures have produced desirable results and FDI
position is more than comfortable now.

2. Role of FDI
As India is a developing country, the scarcity of capital coupled with problematic areas like
inadequate public health facilities, widespread poverty, unemployment, poor R&D base,
obsolete technology, and poor global competitiveness result in hindrances in economic
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Prof. Gurpartap Singh

development. FDI acts a major source of bridging the gap between investment and savings,
technology up-gradation and the development of basic infrastructure. An important role is
played by FDI in capital formation as it helps to bridge the gap between required investment
and the domestic savings (Rajeswari & Akilandeswari, 2015). FDI is more attractive in
comparison to other forms of external finance since it is non-debt creating, non-volatile and
the returns depend on the performances of the projects financed by the investors (Planning
Commission, 2003). It also helps to improve the balance of payments condition and spurs the
domestic firms to counter the competition in a better manner.

3. Changes in FDI policies/limits

As Initially, when there was a move to remove the trade barriers as part of economic reforms,
major industrialist led a lobbying effort against removing trade barriers. They said they were
in favour of removing barriers to imports, but they first required `fair' competition with
imports on a level playing field'. It was argued that the Indian companies must get access to
reliable and trustworthy electricity, high quality ports and airports, a sensible framework of
labour law and a sound GST, a good financial system, etc. Only when all these things were
done would Indian companies have a level playing field when competing against imports
made by foreign companies. Only when these preconditions are met, it would be fair to
remove trade barriers (Shah, 2009). However, the government went ahead with reduction of
tariffs and several new measures were introduced for trade liberalisation.

As part of the 1991 economic reforms, the government also liberalised its policy towards
FDI. Liberalizing foreign direct investment was an important part of Indias reforms, driven
by the belief that this would increase the total volume of investment in the economy, improve
production technology, and increase access to world markets (Ahluwalia, 2007). Many
constraints that had historically been imposed on portfolio and direct investment were
removed. The approval process for technical and financial collaborations was completely
revamped. For many industries, the Reserve Bank of India (RBI) would give an automatic
approval (Beena et al., 2004). Earlier the amount of FDI was low and confined to some
selected sectors, but now the inflow of FDI has grown tremendously and almost in all the
sectors of the economy. Revision of FDI policy during 2005 opened several new sectors for
the foreign investors to start their business (Rajeswari & Akilandeswari, 2015). In 2013, the
government relaxed foreign direct investment (FDI) norms in almost dozen sectors including
telecom, defence, PSU oil refineries, commodity bourses, power exchanges and stock
exchanges (PTI, 2013).

In 2014, the government enhanced the foreign investment upper limit from 26% to 49% in
insurance sector. The ambitious 'Make in India' programme, launched by the government is
another big-ticket ride that the government expects the foreign investors to take to bring
billions worth dollars of FDI into the country (PTI, 2014). FDI up to 100% under automatic
route has been allowed in construction and operation & maintenance in specified Rail
Infrastructure projects. FDI in Defence has been liberalized from 26% to 49%. In cases of
modernization of state-of-art proposals, FDI can go up to 100%. Also, the norms for FDI in
the Construction Development sector are being eased (GoI, 2014).

As compared to the period immediately following the policy changes in 1991, now, whenever
the foreign direct investment (FDI) limits are relaxed for different types of industry, such
announcements by the government are taken in a positive manner. So, in November 2015,
when the government announced relaxing of FDI limits in 15 sectors, including defence,

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retail, mining, civil aviation and broadcasting, it was welcomed by all. The steps include
allowing foreign investment under the automatic route subject to caps in key sectors
including defence and removing restrictions in sectors such as construction and single-brand
retail (Choudhary, Verma & Nandy, 2015). The government also raised FIPB approval limit
to Rs 5,000 crore from Rs 3,000 crore (FE Online, 2015).

2. No need to get too anxious about FDI

But do we really need to be too anxious about FDI coming into the country? Last year, the
then RBI governor Raghuram Rajan said that India is being hampered by a drop in public and
private investments, but held out hope that strong foreign capital flows will help rectify this
weakness (Reuters, 2015). However, according to data on the government's DIPP website, the
total FDI investments India received in January-June period of 2015 was $19.4 billion and in
the whole of 2014, the country received $28.8 billion. In 2013, India received $22 billion FDI
and $22.8 billion in 2012. According to the RBI data, India received $18.9 billion in the first
half of 2015 and $26.4 in 2014 and $25.6 in 2013 (Unnikrishnan, 2015). The figures are very
encouraging and there is no apparent reason for the anxiety or worry over inflows of FDI into
the country.

As per the details said to be revealed in a report published by the UK-based Financial Times
(FT), the FDI estimates for first half of 2015 are still higher. In the January-June period, India
has surpassed US and China as the biggest Foreign Direct Investment (FDI) destination,
garnering $31 billion investments compared with $28 billion attracted by China and $27
billion by the US. In the first half of 2014, India had received $12 billion worth FDIs, thus
more than doubling the kitty in this year first half (Unnikrishnan, 2015).

If, we look at a longer period of about the last 15 years from April 2000 and June 2015, the
cumulative amount of FDI inflows received by India is $380,215 million. Out of this the
largest share of 17% has come to services sector (including financial, banking, insurance,
non-financial / business, outsourcing, R&D, courier, tech. testing and analysis), 9% to
construction development and 7% each to computer software & hardware and
telecommunications, followed by automobile industry, drugs & pharmaceuticals, chemicals
(other than fertilizers), power, trading, and metallurgical industries, in that order (GoI, 2015).
The only cause of concern here is that the FDI inflows are more in the non-manufacturing
sectors. Therefore, efforts are required to get more FDI into the manufacturing sector. It is
hoped that the Make in India programme will become successful and contribute to more
inflow of FDI in the manufacturing and allied sectors.

According to United Nations Conference on Trade and Development (UNCTAD) World

Investment Report 2015, cited by IBEF (2015), India acquired ninth slot in the top 10
countries attracting highest FDI in 2014 as compared to 15th position in 2013. The report also
mentioned that the FDI inflows to India are likely to exhibit an upward on account of
economic recovery. India also jumped 16 notches to 55 among 140 countries in the World
Economic Forums Global Competitiveness Index that ranks countries on the basis of
parameters such as institutions, macroeconomic environment, education, market size and
infrastructure among others. So, what are we anxious about? Really, as per the current trends,
there is no major cause of concern as far as the overall FDI position is concerned.

Another way to look at foreign direct investment is the share of FDI in the countrys total
investment. The most common indicator of total investment in a country is the countrys
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Prof. Gurpartap Singh

gross fixed capital formation. As per the recent figures, Indias FDI inflow is merely 4.3 per
cent of its gross fixed capital formation (Mathew, 2014). Those who are anxious about FDI
inflows would say that this much lower than over 8 per cent global average. However, the
point really to be seen is that FDI alone cannot be relied on heavily for capital formation. For
that, we have to look inwards.

FDI has been growing, is growing and is likely to grow further in the near future. With the
current governments thrust on attracting FDI for economic development, we have seen that
deals worth billions of dollars have been signed with several countries. It has been reported
by IBEF (2015) that based on the recommendations of Foreign Investment Promotion Board
(FIPB), the Government, in a meeting held on September 29, 2015, approved 18 proposals of
FDI amounting to approximately Rs 5,000 crore (US$ 770 million). Some of the significant
FDI announcements have come from Kellogg Co, Taiwan Electrical and Electronic
Manufacturers Association, Posco Korea, Foxconn, Bombardier, Hyundai-ROTEM,
ThyssenKrupp Group, Ikea, Google, Warburg Pincus, Gap Inc., and Dalian Wanda Group to
name a few.

However, FDI is not likely to be a growth engine for the Indian economy. The government
has to concentrate on curbing all forms of wasteful expenditure and stepping up the public
investment in basic infrastructure such as roads, bridges, highways, railway tracks and
airports. Simultaneously, to spur the private investment in building capacities, measures have
to be taken to stimulate the demand.

4. Conclusion
It can be concluded that Foreign Direct Investment (FDI) has an important role to play in
partly bridging the gap between savings and investment. This obviated the importance given
to foreign direct investment in developing countries like India. After the economic
liberalisation in 1991 in the country, foreign direct investment has regularly increased and
now India has become one of the top destinations for foreign direct investment. Over the
years, the successive governments have tried to bring in more relaxations in rules to attract
more and more of foreign direct investment. The present government is also giving lot of
attention to efforts to attract more foreign direct investment. However, even though it is
important to get more foreign direct investment, we need not be overly anxious about it. FDI
alone cannot become the engine for economic development and government has to look
inwards to reduce wasteful expenditure, increase public investment in infrastructure and take
measures to stimulate demand to spur the private investment.

5. References

1. Ahluwalia, M.S. (2002), Economic Reforms in India since 1991: Has Gradualism
Worked?, Journal of Economic Perspectives, 16(3), pp 67-88.
2. Beena, P.L., Bhandari, L., Bhaumik, S., Gokarn, S., and Tandon, A. (2004), Foreign
Direct investment in India, in S. Estrin and K.E. Meyer (Eds.), Investment Strategies
in Emerging Markets, (Cheltenham: Edward Elgar), pp 126-147.
3. Choudhary, V., Verma, S., and Nandy, M. (2015), Govt eases FDI norms in 15 major
sectors. Live Mint, 10 November.
4. Department of Industrial Policy & Promotion, GoI, Ministry of Commerce and
Industry (2015), FDI Statistics. Available from: <http://dipp.nic.in/English/Publicatio
ns/FDI_ Statistics/2015/india _FDI_June2015.pdf.>.

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Prof. Gurpartap Singh

5. FE Online (2015), Narendra Modi govt announces FDI reforms in 15 major sectors.
Financial Express Online, 10 November, Available from: <http://www.financial
express.com/article/economy/govt-announces-fdi-reforms-in-15-major-sectors/16402
3 />.
6. Government of India (2014), Prime Minister to Launch Make in India Initiative.
Press Information Bureau, GoI, Ministry of Commerce & Industry, 24 September,
Available from: < http://pib.nic.in/newsite/PrintRelease.aspx?relid=109953>.
7. Government of India (2015), Fact Sheet on Foreign Direct Investment (FDI) from
April, 2000 to June, 2015. Available from <http://dipp.nic.in/English/Publications/
FDI_Statistics/2015/india_FDI_June2015.pdf>
8. IBEF (2015), Foreign Direct Investment. Indian Brand Equity Foundation, October
2015. Available from: <http://www.ibef.org/economy/foreign-direct-investment.
aspx>.
9. Planning Commission of India (2003), Reports of the Steering Group on Foreign
Direct Investment in India, Academic Foundation, New Delhi.
10. Press Trust of India (2013), FDI witnesses major liberalisation in 2013; more to
follow. Business Standard, 25 December.
11. Rajeswari, G.R. and Akilandeswari, K. (2005), Sector-wise Foreign Direct Investment
Inflows into India, Journal of Business Management & Social Sciences Research
(JBM&SSR), 4(1), pp 73-77.
12. Reuters (2015), Rajan says drop in public, private investments top concerns, Reuters
India Online, 20 November, Available from <http://in.reuters.com/article/india-
economy-rajan-idINKCN0T907220151120>
13. Shah, A. (2009), Where did the Bombay Club go wrong? Financial Express, 14
December.
14. Unnikrishnan, D. (2015), The $31 bn question: Did India really see so much of FDI
inflow in 2015? First Post, 30 September, Available from:<http://www.firstpost.com/
business/the-31-bn-question-did-india-really-see-so-much-of-fdi-inflow-in-2015-2449
942.html>.

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