Banking on FDI
The Hindu, FEBRUARY
04, 2015 13:18 IST
Recognizing the
well-known fact that in terms of industrial growth India has fallen behind many
of its former peers such as Brazil and South Korea, the NDA government has made
the revival of manufacturing the centre piece of its economic strategy.
However, the policy to be adopted to realise this objective has been reduced to
the “Make in India” slogan, often preceded by the word “come”, suggesting that
the intention is to attract foreign investors to invest in manufacturing in
this country to produce for export to markets abroad. The government’s role, if
successful, would be to fashion the policy environment and ensure the
infrastructural conditions needed to facilitate such investment.
This strategy is by no
means novel, having been experimented with by many a developing country in the
past four decades. Other than a few, most such experiments have failed. And
making this bet at a time when the world economy is still battling with
recession may not be all to wise. What is more, given India’s large domestic
market, even when foreign investors come to India they are likely to make for
the domestic rather than the export market.
Consider for example
India’s own past experience. The Reserve Bank of India (RBI) has recently
released a bunch of numbers on the foreign assets and liabilities of companies
registered in India and the finances of Foreign Direct Investment Companies
(FDICs) operating in India. (FDICs are firms in which a single foreign investor
has at least 10 per cent of equity, which (arbitrarily) is taken as indicative
of substantial and long-term interest.)
Since 2011 the Reserve
Bank of India requires all companies that have received foreign direct
investment and/or themselves made investments abroad to file returns on their
foreign liabilities and assets. This information collated and released by the
RBI point to significant domination by foreign firms in the foreign invested
sector. Thus the share of FDI in equity (at market value) of companies with
foreign ownership of equity stands at 63.9 per cent in the case of financial
companies, and a larger 74.5 per cent in the case of non-financial companies
(Chart 1).
Further, the market
value of the stock of foreign direct investment equity at the end of March 2013
amounted to 59.4 per cent of the total value of invested capital minus
outstanding loans in the registered manufacturing sector. This overwhelming
presence, no doubt, partly reflects the unwarranted asset price inflation in
India’s stock markets. But, it must be remembered that foreign investors not
only own equity of this value. As a result of holding that equity as the
largest or the majority shareholders in various enterprises, they have
management control of all assets in those enterprises.
Thus, as the Indian
government stretches itself to attract more foreign firms to come make in India
and convert the country into another manufacturing hub for the world, it may be
useful to assess some features of the experience with these firms that are
already making in India. There are clearly two sectors into which foreign
capital dominantly flows: manufacturing (which accounts for close to 50 per
cent of FDI equity valued at market prices; and services (especially financial
and business services) which accounts for another 40 per cent (Chart 2). So
firms do clearly come into the sectors in which the government sees India as
having an advantage because of a low wage, skilled and partly English-speaking
workforce.
What is striking is
that despite the claim that liberalization, by exposing domestic capacities and
firms to the cutting edge of international competition, would restructure and
render them internationally competitive, subsidiaries of foreign manufacturing
firms in India are not using India as an export platform. Taking foreign
subsidiary companies as a whole exports accounted for a reasonable 32 per cent
of their sales. But that was because firms in the ‘information and
communications sector’, which accounted for 17 per cent of sales of all firms
covered, exported as much as 70 per cent of their sales. Foreign firms that
were investing in manufacturing in India, on the other hand, were largely
catering to the domestic market.
This has had a curious
result from the point of view of the balance of payments.
Data on the finances
of 917 non-government, non-financial foreign direct investment companies in
2012-13 released early January show that over the three-year period 2010-11 to
2012-13, the earning in foreign currencies of foreign direct investment
companies averaged 22 per cent, whereas that ratio in the case of non-FDI
companies stood at a higher 26 per cent. Foreign invested firms were less
engaged with export markets when compared with non-FDI firms. Evidence from the
past suggests that the net foreign exchange earnings of FDICs is negative.
Hence, unless the
policies adopted by the government result in a fundamental transformation in
the behaviour of foreign firms investing in Indian manufacturing, the hope that
the country could ride on their backs to export-driven economic success is likely
to be belied. That would be true even if the world economy recovers from the
current recession.
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