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FDI: Is India on right track?

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  17 Aug 2016 12:00 AM GMT

By Dr B K Mukhopadhyay

The government has eased foreign-direct investment [FDI] restrictions in several sectors to increase inflows. Actually, since assuming office in May 2014, the government has moved to relax investment rules, helping the country emerge as one of the top destitions for foreign money. The policy changes relax foreign direct investment thresholds in the retail, defense and civil-aviation sectors among others. The move sigled that the government was pushing ahead with its effort to liberalize its economy.

Changes Clearly Visible

As part of the changes, foreign-owned single-brand retailers would have a three-year grace period from complying with local-sourcing requirements that demand they buy at least 30 percent of their manufacturing materials from Indian vendors. After that, the rules for retailers offering “state-of-the-art” or “cutting-edge” technology would be relaxed for another five years.

Among the other policy changes, the government allowed foreign investors to own up 100 percent of domestic airlines, raising the limit from 49 percent. It didn’t tinker with the current ceiling of 49 percent for foreign airlines to invest in domestic carriers. It also removed a condition that foreign companies must bring in state-of-the-art technology for investments of over 49 percent in the defense sector. Of course, with the latest change, after obtaining government approval, foreign investors will be permitted to own up to 100 percent of local defense ventures.

The Government has also permitted foreign companies to own up to 74 perecent in “brownfield” pharmaceuticals projects without prior government approval, but proposals for 100 perecent foreign direct investment will still be scrutinized by the government.

It also raised the foreign direct investment limits in broadcasting carriage services, including mobile television, cable networks and direct-to-home services, to 100% from the present 74%.

Incidentally, it may be mentioned here that India registered a 29 percent jump in foreign direct investment inflows to $40.46 billion in the fiscal year ended in March, 2016, compared with $30.93 billion in 2014-15.

Can We Perform Better With Sluggish FDI?

Now, at this juncture, the question arises: is it that FDI - a measure of foreign ownership of domestic productive assets such as factories, land and organizations – all bad or all is well? Why not to examine the same as a neutral observer!

The growth of foreign direct investment [FDI] in the last three decades has been phenomel. FDI can take the form of a foreign firm buying a firm in a different country or deciding to invest in a different country by building operations there. With FDI, a firm has a significant ownership in a foreign operation and the potential to affect magerial decisions of the operation.

While developed economies still account for the largest share of FDI inflows, recent datum show and indicate that stock and flow of FDI has not only jacked up, but moving towards developing economies also – more specifically to the fast emerging economies, globally! Apart from using FDI as investment channel plus a method of reducing operation costs, many blue chips are looking at FDI as one of the ways to intertiolize.

Side by side, the reality is that the movement from developed to developed zone still remains higher, compared to that between developed to developing or developing to developing zone. Still, the stock and flow of FDI has gone up and moving towards developing zone and more so in the emerging economies.

The positive side of FDI must not be missed as otherwise any alysis on this score is bound to be biased. Opposition for oppositions sake is never desirable nor a fit case to be entertained by responsible quarters. The sole important thing is whether the economy loses control or allows it to act in a way which is detrimental to economy’s well being / interest.

One of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made. This is especially applicable for developing economies - during the 1990’s FDI was one of the major exterl sources of fincing for most countries that were growing economically.

UKTI rightly observed that any special focus on tax and FDI shows that multitiol enterprises (MNEs) minimise their tax burden through their overseas operations and provides new evidence indicating the strong link between corporate tax rates and FDI performance. Governments face a huge challenge in ensuring MNEs pay the tax due without undermining their attractiveness for FDI. Coordited multilateral action would seem the only way to achieve this.

Experiences Not That Bad!

Historically speaking: The growth of foreign direct investment, in the last four decades, have been phenomel. FDI can take the form of a foreign firm buying a firm in a different country or deciding to invest in a different country by building operations there. With FDI, a firm has a significant ownership in a foreign operation and the potential to affect magerial decisions of the operation.

The Case of Telefonica

The intertiol growth of Spain’s Telefonica is something to take note of: until the 1990s Telefonica was a typical state-owned firm. Since then it expanded into Latin America and Europe, among other regions. Mittal Steel’s is another example on this score: expansion from a small, family-run operation in India, to being the world’s largest steel company headquartered in Rotterdam. Mittal Steel’s growth strategy involved acquiring companies in distress at low prices, improving their efficiency, and capitalizing on a growing demand for steel. Mittal Steel also used its growing power in the industry to drive down the prices of raw materials. Mittal Steel’s most recent acquisition involved European steel maker Areclor, which was acquired in a hostile takeover in 2007 to create ArcelorMittal. Today, the firm boasts sales of $110 billion and a net income of $10.2 billion.

In Lieu of Conclusion

Is it not a fact that foreign direct investment helped several countries when they faced economic hardship economies like Chi, South Korea, Singapore as well as Philippines availed maximum benefits that helped them to fly high? So, a realistic step could yield better result for such economies also.

To what extent the move would provide a major impetus to job creation and infrastructure and make India the most open economy in the world for foreign investment would be keenly watched, obvious enough!

(Dr Mukhopadhyay, a noted Magement Economist, an Intertiol Commentator on Business and Economic Affairs and Principal, Eminent College of Magement and Technology, Kolkata, India.)

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