By Akshay Kumar
Governments approval to raise FDI (Foreign Direct Investment) limits in 12 sectors should stir up hornets nest of both protagonists and antagonists. On the other hand, the scenario is perfect for economics, and partially political, enthusiasts to study the history and learn the basics of FDI, an acronym that went viral in the second half last year. Before analysing the current move to drastically alter FDI investment patterns and raise caps in key sectors such as defence and telecom, one should leverage the opportunity to look at the history of FDI in India. As shown in figure below, the history of FDI in India can be divided into and understood in four phases beginning with the reluctant opening of Indian economy to FDI in 1948.
With this insightful background in hindsight, one can try to evaluate the current move that raises FDI limits across sectors or relaxes investment norms providing less cumbersome options. Overall the proposed changes can be categorized into two classes. One, offering the route of automatic approvals rather than through Foreign Investment Promotion Board (FIPB) in the case of petroleum and natural gas and refining; commodity exchanges, stock exchanges; and power exchanges, thereby eliminating cumbersome approval process from the FIPB while keeping respective sectoral caps pegged at 49%. This is not outrageous, to say the least especially considering the move is targeted at limiting red-tapism and ameliorating current dwindling investor confidence. Second, the proposal to increase FDI limits in 12 sectors, as also proposed by the Arvind Mayaram Committee, has instead raised frowning eyebrows from antagonists. One might argue such a policy move on the relevance of targeting FDI on account of already robust and proliferated 15% growth in FDI inflows this year as compared with that of past year. After all, against the backdrop in which global economies were continuing to drown in the pool of dwindling fiscal deficits and pertinent rates of unemployment, India still offered unique value proposition to stakeholders via its pool of talented manpower, favourable demographics, and a more liberalised FDI sector than ever after the opening/ liberalising of sectors such as multi-brand and single brand retail, and aviation last year. And the nations FDI prospects were continuously evolving; inflows to the services sector were on the rise and flows to manufacturing were expected to increase as Japan and Korea were on the anvil of establishing industry-specific industrial zones in the Delhi-Mumbai industrial corridor.
The intent of policy moves further took a pounding when soon after the policy changes were announced: South Korean steel giant Posco gave up its plans to build a $5 billion steel plant in Karnataka and ArcelorMittal withdrew on its plans to build a steel plant in Orissa. Further, the DIPP (Department of Industrial Policy and Promotion) issued various Discussion papers from 2008 to 2011 on FDI and FDI in relevant sectors. However, this move suddenly vanished from the public domain in the last 2 years despite growing confrontation after last years FDI proposals in retail and aviation sectors. It is in this background that protagonists of the move rate the move as unheeded and bewildering, lacking strategic vision and, instead, tear-provoking.
The biggest reason why any country should seek investment from foreign companies in the form of Foreign Direct Investment rather than other forms such as Foreign Institutional Investments is that such sums of investments, not only deliver long-term benefits, such as bolstering industrial capacity base and supply chains but also, aid in technology transfer, offer employment and develop indirect capabilities and opportunities. In the current context, however, if one pushes the boundaries of reasoning to the domains of 1920s Dominion Status ideology, one must admit that the reasons for pushing FDI were altogether different from the fundamental reasons. The story of India in past decade has completed one full circle of a legendary economy. While, for the most part of the previous decade, the Indian economy impressed almost every notable economist; the economy scaled heights by becoming the 4th largest economy in the world, sustaining nearly double digit growth rates during initial stages of the global financial turmoil of 2007-08, and reaching soaring stock markets indices and FDI inflows. On the other hand, heaven seems to have transformed into heaven and promising growth into weakening macroeconomic indicators, at least. Rupee is at an all-time low against the dollar, reflecting a strong symptom of Indias weak growth and inflation differentials. The Asian Development Bank, IMF, World Bank, OECD (Organization for Economic Co-operation and Development) have already pared Indias 2013 GDP growth rate from their earlier projections, weighing the slowing investment, weak industrial activity, and plodding progress on reforms.
In addition to this, when one also considers the damage that funding gap existing on the balance of payments and the speculation riding on this funding gap can unleash, the move to alter the present FDI landscape in such a manner should not come as a hard surprise. Not only this, RBI may hike interest rate defence to tighten liquidity conditions in the July end review. One might question opening strategic sectors such as defence in this backdrop. However, when one takes into consideration that Indias maximum spend of the budget is on defence sector which hardly either garners any revenues or encourages development of indigenous capabilities, one should rationally consider FDI in the defence sector and try to leverage technology transfer to indigenize defence.
The bottom line is that in this bleak macroeconomic and speculative forecast even such a drastic move is unlikely to revitalize the Indian economy and the cautious investor sentiment. Wait and watch attitude seems to be the only pragmatic indicator to evaluate whether the radical move is palatable.
Akshay Kumar: He is an undergraduate in Civil Engineering from IIT Delhi and, currently, working at Ernst & Young in strategy consulting. He has been engaged in debating for the past 11 years at various levels. Since past 4 years, he has primarily focused on policy and economics debates and research papers and has been engaged at premier global debating platforms such as G8-G20 Group, Harvard debates, EUDC. Recently, he has developed debating models and tested them at national debating conferences