Indian FDI is now driving many foreign economies
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Home General

Indian FDI is now driving many foreign economies

Archive Manager by WEB DESK
Apr 15, 2012, 12:00 am IST
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ECONOMY WATCH

Outward flow of FDI good for us?


Dr Bharat Jhunjhunwala

$img_titleOh! How the game has changed! Twenty years ago Indian intelligentsia was split in the middle on the question of Foreign Direct Investment (FDI). The Government, led by the then Finance Minister Manmohan Singh, wanted to open the economy rapidly to FDI. On the other hand, the Swadeshi brigade alleged that this would amount to second colonialism. MNCs would come in and smother home grown industries. Profit repatriation would bleed the country dead. In retrospect, neither side has been proven right. Instead, the healthy friction between the two has led to our following the golden mean. India has not been smothered by the MNCs; instead Indian MNCs are set to smother companies across the world.

FDI by foreign companies in India fell from $18.8 billion in 2009-10 to $7.1 billion in 2010-11—a decline of 62 per cent. On the other hand FDI by Indian companies abroad increased by 144 per cent from $18.0 billion to $43.92 billion. Last year Indian companies sent out six times more money than they received as FDI. There has been a dip in outward FDI in June but this seems to be a blip in the story.

Some do not see the growth of outward FDI favourably. Argument runs that failure to take the reforms forward, endemic corruption and general comatose in governance has sapped the will of the corporate world. They are seeking greener pastures in foreign countries instead of investing at home. These facts are indeed correct. But they tell only part of the story. The fact that India’s growth rate continues to be robust at 8-9 per cent indicates that we are not going downhill. Indeed, the UPA 2 government is bending backwards to accommodate the corporate world. Grapevine has it that Jairam Ramesh was shifted from the Ministry of Environment and Forests because he stepped on too many corporate ambitions.

The increase in outward FDI seems to indicate that Indian businesses have come of age. Instead of being threatened by MNC prowess they are now willing to take on the global MNCs on their own turf. This fortuitous situation has emerged because neither side in the debate of the nineties has ‘won’.

Critics say that this new found confidence among the Indian businessmen shows how out of tune with reality Swadeshi economists have been. This is not true. Argument of Swadeshi economists was that the long term burden of repatriation of profits of FDI would be more than the short term gains. Second, the government was encouraging FDI not to expose the domestic businesses to international competition, which would have been welcomed, but to get easy money for its borrowings in the domestic money market. Third, indiscriminate opening of the economy to MNCs would not get us new technologies. Thus, they argued that there should be ‘optimal’ opening of the Indian economy to MNCs. The objective should be to cajole the Indian businessmen to face up to global competition and to obtain frontline technologies. The objective should not be to attract foreign money; but to develop Indian capabilities. A mother has to expose the child neither to too much nor to too little competition. She has to adjust the level of challenge to the child’s ability to respond. Similarly the government should adjust foreign competition to the capacity of Indian business houses.

This resistance by the Swadeshi economists had slowed the opening of the Indian economy. Foreign investment in the insurance sector, for example, was restricted to 25 per cent equity. In retrospect it is difficult to say whether this was good or bad. It is possible that Indian businesses could have borne speedier opening. It is also possible speedier opening may have led to a collapse of the Indian business. Such counterfactual questions are difficult to answer and not relevant.

Be that as it may, Indian businesses have not only withstood the MNC challenge but are now moving in the opposite direction. The challenge now is for us to provide leadership to other developing countries. India must not follow the footsteps of Western MNCs in exploiting other countries. These MNCs had made huge investments in Africa in the sixties, Latin America in the seventies and eighties and South East Asia in the nineties. All these regions are lagging behind in economic growth rates. Africa has mostly become a basket case. Latin America has just crossed her second ‘lost decade’. East Asia has become a sick tiger. Reason is that rapid opening to FDI indeed disabled and demotivated domestic businesses to compete and grow. The MNCs brought in huge investments. Initially they led to high growth rates. But, having killed domestic businesses, they started repatriation of profits. The host countries are today left with debilitated domestic business.

The challenge before India is to create a new type of MNC culture. The objective of Western MNCs has been to extract money from the developing countries through profit repatriations, royalty payments and transfer pricing and enrich their home countries. Their objective is not to reinvest and help the host countries grow.

Indian companies investing abroad have two alternatives before them. They can adopt the same extractive policy that has been adopted by the Western MNCs. They can extract profits and impoverish the host countries just as the MNCs have impoverished India. Alternatively, India can invest in other countries to help them grow. The objective may be to plow back the earnings, substantially if not wholly, in the host country.

Nevertheless, critics are right that the investment climate in India is less than desired. We have not been able to cross the magic 10 per cent growth rate. The Government is lagging on reforms. I believe that the problem is not the unwillingness of the Government to push reforms. Problem is that corporate-led growth model is not delivering for the millions of our people. They feel left out of the growth story. Incomes of the upper classes are rising much faster than that of the lower classes. The chasm between the rich and poor is widening although stark poverty has been much reduced. The Government is not able to push through reforms because that will further alienate the common man. The second task, therefore, is to reach benefits of growth to the people in a growth-friendly way.

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