Declogging FDI inflows

By S. Swaminathan

At the time when the first NDA coalition Government took office in 1998, there was a predominant attitude of hysterical opposition to foreign direct investment (FDI) on the part of the BJP, the leading light in the coalition. In its election manifesto, the party had spoken loftily about ``calibrated globalisation" with an unconcealed disdain for FDI which it dismissed as an insignificant element in the total investment activity in the country. Granting that the subsequent mood of enlightenment on the part of the Vajpayee Government regarding the manifold benefits of FDI as a powerful tool for modernisation of the Indian economy without the hazards of accumulation of external debt obligations, did send out clear messages to the international investing community that India was quite positively inclined towards FDI, the actual record of FDI inflows has been unimpressive even in terms of modest expectations. An annual average of $2.5 billion for 1999-2001 appears to have been an epic achievement even if it represents hardly 2.5 per cent of the aggregate investments in the economy.

The Union Minister for Industry, Mr. Murasoli Maran, has undoubtedly brought a new dimension of a pragmatic vision into the policy domain, seeking to disentangle the cobwebs that have crowded out FDI in the past. He has not only widened the ambit of industry open to FDI but has ensured that the ``automatic route" to FDI clearances has become increasingly available for foreign investors.

In an effort to bridge the gap between FDI approvals and actual inflows, he succeeded in setting up the Foreign Investment Implementation Authority (FIIA) in 1999, designed to function as a fast-track facilitation device to help foreign investors clear bureaucratic hurdles at the Central and State levels. Have all these remained as good intentions or have they translated into sustainable large inflows of FDI?

Current scenario - a sombre perspective

Although the statistical methodology of the Union Industry Ministry lumps FDI and portfolio investment flows together, a real picture of FDI inflows, in accordance with the Reserve Bank of India data, shows that the high-point in FDI inflows was reached in 1997-98 when FDI amounted to $3.6 billion. That was before the U.S. economic sanctions were clamped down against India. What needs to be noted is that for three successive years, 1995-98, FDI approvals averaged around $11 billion although the actual inflows did not exceed $3 billion on an annual average. There has been some improvement in the ``realisation rate" of FDI since 1996-97 when it was only 29 per cent. In 2000-01, the rate is said to have gone up to about 52 per cent. Yet, with all this, the situation seems to be far from promising. The first six months of 2001 seem to have recorded an FDI inflow of $1.8 billion, even less than the amount that came in during the corresponding period in 2000.

FDI, a critical issue

At a time when the economy is passing through a state of stagnant demand and investment inertia, there is no gainsaying the need for kick-starting activity. One major thrust area for restoring vigour to the economy through revival of demand is what is perhaps latent in the agricultural system, a possibility of a turnaround in output, thanks to a favourable monsoon. Of course, the caveat here is that a bumper crop should not lead to a further weakening of prices of agricultural commodities. This apart, the stimulation of investment would brook no delay.

What could be more dependable than investment decisions already arrived at by foreign investors for which approvals have been secured, being expedited on the ground? It is in this sense that implementation of FDI approvals holds the key for a rejuvenation of the economy. That the task is more easily defined than accomplished is well-known.

The reality is that the impediments to implementation of FDI approvals reside both at the Centre (with its various ministries that continue to wield ``veto powers") and with State governments with their own obstructionist bureaucracies and corrupt political establishments.

Dented image

It is true that India is not in the top of the league among the emerging markets of the world in terms of global competitiveness. As corporates elsewhere look at India, it is not a tax haven even making allowance for the fact that post-tax earnings compare favourably with margins yielded by advanced economies. Despite the dramatic reduction in customs tariffs over the years, India continues to be a poor comparison to the East Asian economies, as a global export platform. Even after the softening of interest rates, over the last two years, money costs for industry continue to remain uncompetitive in global terms.

Although in sheer size of the market and potential demand, India inspires an awesome evocation - comparable only to China - the current outlook seems disturbingly unfavourable. With the Enron tangle remaining as forlorn as at the beginning, it is not surprising that foreign investors have begun to sense India as a sovereign nation with its own perverse disposition towards contractual obligations. It is not as if Enron is the Omega of all FDI in India. Yet, it would not simply do for the Vajpayee Government and the disparate rulers at the State capitals to assume that foreign investors have an obligation to underwrite India as an economic power-house of the future!

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