Foreign direct investment

THE RECENTLY RELEASED World Investment Report 2001, an UNCTAD publication, has plenty of relevance for Indian policy concerning foreign direct investment (FDI). Its key points, although not startlingly new, need to be carefully analysed if only because their implications can impact on the entire spectrum of the macro-economy and help understand India's competitiveness in a changing global scenario. According to the report, FDI flows on a global scale increased by a substantial 18 per cent last year to touch a record $1.3 trillion. As in the recent past, such large flows are due to a sharp jump in cross border mergers and acquisitions (M&As) and not because of a spurt in investments in greenfield ventures. The World Investment Report, however, is not optimistic on FDI flows continuing to be buoyant this year. The general slowing down of the global economy has begun to take its toll. Although not recorded by the Report, specific events, most notoriously the September 11 terrorist strikes on America, will, by raising the risk premium enormously, choke FDI flows.

Predictably - this again is in line with the past few years - FDI flows have not moved uniformly across the world. Less developed countries continue to remain in the periphery, barring a few exceptions. Cross-border M&As, especially, have been a rich man's game. Being the main engine for capital flows they have sidestepped many countries. Ten developed countries dominate FDI flows as both recipients as well as sources. They attracted more than $1 trillion of FDI flows last year. Developing countries' share of aggregate FDI flows has fallen over the years to 19 per cent which is the lowest since 1991. In absolute terms, however, they received $240 billion in the year 2000, which was an improvement over the previous year. A study of capital flows cannot ignore the competitive positions of India and China. India received $2.3 billion last year, the highest by South Asian standards but puny in relation to the $41 billion of China, whose data incidentally excludes those of Hong Kong which received a whopping $64 billion. Ominously for India, investors have begun to favour China because of its technical skills, a far cry from the early days when it was just a low cost production centre. The implication of this for India, which has been receiving a major share of its FDI in the areas of computers - both hardware and software - and services is enormous. No longer can there be complacency in projecting India's strengths in sectors beyond the knowledge industries even though the latter will continue to remain its major attractions.

At a more general level, India, which has been fine-tuning its policy on external flows, has tried to make the investment climate more congenial. The Government has decided to permit all FDI under the automatic route keeping only a small negative list. New foreign investment proposals in the information technology sector are entitled to automatic approval irrespective of whether the investor has an existing joint venture or collaboration in the country. Foreign direct investment up to 100 per cent is allowed for business-to business e-commerce subject to certain conditions. The upper limit of Rs. 1500 crores for foreign investment in electricity generation, transmission and distribution has been done away with. The Union budget substantially liberalised the procedures for FDI in non-banking finance companies.Those and other steps are part of a gradualistic approach towards external flows. Domestic compulsions, whether legislative, institutional or regulatory, do not permit any other course. Policy-makers are now factoring in stability considerations while evaluating all capital inflows including FDI. Beyond doubt FDI will score high in the country's wish-list, more so if it is directed towards greenfield ventures. Considering the poor record in converting sanction into actual investment, it is hoped that they do not remain just that.

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Section  : Opinion
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