FDI: Not sufficient but necessary
Nobody better than PM Modi himself will realise that his objective to make fibre from farms and machines from ores will only be met if his masterplan includes one hobby horse of pro-globalisation pundits – FDI!
Steven Philip Warner | The Dollar Business
Deng Xiaoping – the name may simply sound “very Chinese” to most. Let’s make this simple – he literally invented Foreign Direct Investment (FDI) in a China immersed in ideologies freely distributed by the old Mao Zedong school of socio-politics and therein intoxicated with anti-Capitalist scriptures floated around during the great proletarian cultural revolution. In short, he reduced Chinese obsession with everything being Chinese from “root-to-fruit”, strictly in the industry sense. Xiaoping is today regarded as the economist-first-politician-second, who masterminded the ‘Made in China’ market weapon that the world is in awe of still, two long decades after he became ‘present’! India needs a Xiaoping – less by heart, more by mind.
Left brainers won’t be required to engage themselves in rapt concentration to recall that the second half of May also marks one year of our new Prime Minister having assumed office, with an agitated political war cry of Achhe Din preceding his rather calm victory. Call it a coincidence, but as if in celebration of the calendar, on May 16, Modi appeared brave when he stood tall to declare thus amidst a healthy gathering of Chinese leaders in Shanghai: “We want to make things in India. For the purpose, we have launched a campaign called ‘Make in India’...” [Brave, because you cannot not help but raise a few eyebrows when you add any other proper noun other than ‘China’ after the two words ‘Make in’. And especially when you have any non-Chinese Head of State addressing a public gathering in China’s financial capital!] And nobody better than PM Modi himself will realise that his objective to make fibre from farms and machines from ores will only be met if his masterplan includes one hobby horse of pro-globalisation pundits – FDI. His task however will prove as difficult a wrestle that Xiaoping had with the then-existent agents and state of affairs in his country (during the late 1970s and early 1980s).
An area where pro-FDI voices often go wrong is that they subordinate their passions to the larger universe. As we’ve discussed in the cover story this issue, FDI is not the be-all and end-all of a nation’s industrialisation and development story. It never was and never will be. At the same time however, a healthy inflow of FDI is a necessary condition, if not sufficient, to make a nation a respected manufacturer-exporter. Let us focus squarely on one India-China comparison for some quick understanding. The first official annual record of FDI inflow into China was in 1980 that amounted to $57 million. Thanks to an increased encouragement from the Chinese government to encourage this positive force in all respects, today, the total FDI stock in China is almost $1 trillion (UNCTAD data). On the other hand, FDI inflow into India had already reached the $57 million in FDI inflow mark six years ahead of China (in 1974). But thanks to consciously undetermined policies and with foreign investors largely being on the horns of a dilemma for most of the past 40 years, our total stock of FDI is less than a-fifth of China’s today! And you don’t want me to tell you how the India-China comparison goes in all macroeconomic respects today.
The official verdict today is better grounded in data and research. There are some strange contradictions in India’s FDI Policy (the latest version was released by the Department of Industrial Policy and Promotion – DIPP – on May 12 this year; another co-incidence?). Impossible to enumerate all of them in limited space, let me just handpick five issues, industry-wise.
Why is it that while in Telecom Services, the equity cap allowed is 100%, while that in a seemingly-related area, Broadcasting Services (including DTH, Teleports, Cable networks) the limit is 74% despite a common condition on entry route limits for both? And if you contest that they aren’t remotely close, why is there this body called Telecom Regulatory Authority of India – TRAI – that voices opinions and issues norms for all these business from time to time?
Why is there a 49% cap on FDI in Scheduled Air Transport Service (the one that is made available to everyday Indians, aam aadmi as you would like to call), 74% in Non-Scheduled Air Transport Service, and 100% in Helicopter Service? Because bureaucrats and government officials need more efficient and safe modes of flying?
Talking of airport projects – what’s the logic behind allowing 100% FDI through the automatic route in greenfield projects and only 74% in existing (brownfield) projects? Going by the poor state of facilities and security at many Indian airports – which is often cited as a cause of concern for tourism and other business-related sectors, should the policy not be open to 100% investments in both areas? And if national security is really the other, why allow more than 74% FDI in even new projects?
If 74% FDI is allowed to private bankers, why is there a lower 49% cap in Insurance? Should Indians entrust their money and life covers of greater value in the same hands differently?
And if anything needed to be said to prove how our FDI Policy itself is marred with contradictions, one need not look beyond the oft-debated multi-brand retail industry. As per our FDI Policy, the cap on FDI in multbrand retail has been maintained at 51%. But leaders of the ruling party claim that this limit is just an on-paper policy and that the government’s stand on being opposed to FDI in multi-brand retail stays. As such no proposal of FDI in multi-brand retail will be approved! Ironical for a change in rule that was brought about four long years back. How secure will that make foreign investors feel?
TDB Intelligence Unit findings based on World Bank data prove how India’s FDI policy – related to caps and numeric limitations imposed – appears out-of-sync with tunes of globalisation. Forget global standards and those followed by developed economies, as compared to even a group of mostly low-developed South-East Asian economies (including Afghanistan, Bangladesh, Bhutan, Iran, Maldives, Nepal, Pakistan and Sri Lanka), sector-after-sector, the FDI limits allowed are lower. Here are seven broadly defined average FDI caps for comparison: Agriculture & forestry (India: 50.0%, South Asia: 90%, Global average: 95.9%), Light manufacturing (81.5%, 96.3%, 96.6%), Telecom (74.0%, 94.8%, 88.0%), Banking (87.0%, 97.2%, 91.0%), Insurance (26.0%, 75.4%, 91.2%), Transport (59.6%, 79.8%, 78.5%), Media (63.0%, 68.0%, 68.0%), Construction, tourism & retail (83.7%, 96.7%, 98.1%).
The unfriendly caps are just the tip of the iceberg that prevents many-an-investor ship willing to set up manufacturing plans and plants in our high-quality manufacturing-starved economy and initiate transfer of knowledge and technology into the Indian manufacturing landscape. Straigthforwardly stated – MNC-friendly policies are to be put in place. You cannot have non-uniform and non-transparent tax regime in place and expect foreign investors to be delighted. Taxation policies in India remain inherently complex – billions of dollars of litigations regarding tax payment by foreign companies is one proof. Corporate tax rates in most nations are in the range of 15 to 25% (as per a TDB Intelligence Unit analysis of KPMG’s Corporate Tax Rate database). In India, the rate is 40% (and we are not talking yet of the complicated indirect tax regime in India)! Compare that to China’s 25%, and you get the drift. Reduction in bureaucracy, regulations and corruption, relaxation in labour laws, a focus on export-oriented manufacturing, creation of high-quality SEZs, direct involvement and accountability of state governments in aiding FDI, etc., are some other areas that need urgent attention.
The focus on Exports Focussed FDI (EFDI) is also critical. As compared to Local Market FDI (LMFDI), the “quality of FDI is better and much larger” as claimed by a research paper titled, ‘Attracting Export-Oriented FDI: Can India Win the Race?’ by scholars Abraham and Pradhan of Gujarat Institute of Development Research, Ahmedabad. The paper concludes that “One critical component of ‘quality of FDI’ lies in its extent and intensity of local linkage generation. EFDI can be expected to generate strong links with local economy compared to LMFDI in the host country...” As such, while on one hand the possibility of ‘knowledge spillovers’ from EFDI is much larger than LMFDI, EFDI will ensure that the ‘crowding-out’ effect is done away with, because the market shares of domestic companies will then not be eroded. There is no doubt that India is in an ideal position to boost its exports by making the most of FDI, as an OECD report titled, Foreign Direct Investment for Development: Overview’ states: “The clearest examples of FDI boosting exports are found where inward investment helps host countries that had been financially constrained make use either of their resource endowment or their geographical location.” There is no denying that India is blessed in terms of both resources and geography (take a look at the world map – how high-growth economies are splattered right around India!). If Mexico can be taken as an example, India will have a lot to gain from FDI boosting its global trade linkages. Post the mid-1980s and the birth of The North American Free Trade Agreement (NAFTA), FDI inflow into Mexico grew tremendously. It was the largest FDI recipient in Latin America by 2001. With low entry barriers to FDI actively pursued by the Mexican government, the knowledge spillovers and infrastructural development that occurred in Mexico, have made it the second-largest trading developing country in the world with nearly 67% its exports coming from MNCs!
PM Modi isn’t one who limits himself to being identified as a single character. In one year, he has already proved an economic explorer. Undeniably, what lies within the nation is his prime concern. But the next question he will need to answer is – what lies within the nation for those without (foreign investors)? And be it the no.2 question, its answer will play a significant role in deciding the fate of the bold claim he recently made in Shanghai.
It’s time for his cabinet to eradicate from India the fear called xenophobia!
May 25, 2015 | 2:58 pm IST.
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