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FDI: Where are we headed? - Views on News from Equitymaster
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  • Mar 25, 2004

    FDI: Where are we headed?

    Foreign Direct Investment (FDI) has been one of the most debated topics in the country for a long time now. While FDI assumes large importance in the development of any country, in the Indian context, FDI flows has always been a disappointment. Due to the focus of economists and analysts on FDI inflows issue, the reclassification of FDI components has led to a picture pointing to higher quantum of FDI in to India over the last few years.

    Item/Year FY01 FY02 FY03E*
    Revised FDI to India (a+b+c) 4,029 6,131 4,660
    a. Equity 2,400 4,095 2,700
    b. Reinvested Earnings 1,350 1,646 1,498
    c. 'Other Capital' 279 390 462
    FDI Data Currently Published 2,342 3,905 2,574
    Additional Amount on
    Account of Revision
    1,687 2,226 2,086

    Source: RBI
    * Estimates

    The reclassified FDI figures have been shown in the table above. While, due to this reclassification, there may be a significant rise in the quantum of FDI inflows into the country, the fact remains that these inflows are still very low to create any significant impact on India's growth. Now, one may ask as to what role FDI plays in the development of any economy? Higher FDI inflows have various benefits for any economy. Foremost among the benefits is the fact that FDI brings along with it superior technology, which helps increase the productivity of the respective sector and the economy as a whole if the inflows are sustained over a long period of time.

    FDI also brings in competition that is beneficial to the end consumer in terms of cheaper and good quality products. Increased competition also exposes the consumer to new products thus expanding the domestic markets further. Then, FDI also leads to higher employment levels especially in the industrial sectors, which are labour intensive in nature. On the external front, FDI can also act as a stimulator for growth in exports. High productivity and scale of operations can make a case for higher exports as companies tend to become more cost competitive on a global scale. China is a classic example for all the benefits mentioned above.

    Over the last 4-5 years strong rise in FDI has stimulated the Chinese economy to such an extent that apart from having a vibrant domestic market, the Chinese have emerged as one of the largest exporters in the world. Their contribution to world trade is estimated at 5.1% and the country is the fifth largest exporter in the world after the US, Germany, Japan and France. China has also emerged as one of the largest consumers of almost all commodities like steel, cement and aluminium. The country, apart from being one of the largest consumer durables market, is also the one of the largest telecom services markets. As far as employment is concerned, according to official Chinese statistics, by the end of 2001, China was able to generate employment for additional 9.4 m citizens.

    In contrast, India, which received a cumulative of US$ 28 bn of FDI in the last 10 years, has shown inconsistent economic growth. Employment statistics suggest that only 3 m jobs yearly on an average have been added in the period between FY94 and FY00. Our trade, i.e. exports and imports, are only 1% of the total world trade. Our consumption of commodities like steel and cement (which indicates growth in infrastructure) remains abysmally low as compared to our neighbour. These comparisons have been made to highlight the nature of growth drivers in both the economies. While India received a cumulative of US$ 28 bn in FDI over the last 10 years, China received close to US$ 50 in FDI in 2002 alone.

    No doubt that the Chinese economy may be far more liberal than the Indian economy, but the apparent contribution of FDI to Chinese economic growth cannot be ruled out. No doubt the Indian economy is opening up its doors further, but impediments like the slowdown in the disinvestment process, lack of clarity and slowdown in the liberalisation of FDI norms in the country do not bode well for the economy. As long as a majority of the populace is still dependent on the agricultural sector, the growth that is likely to be seen in the Indian economy in FY04 may not sustain going forward.

    The need of the hour is, thus, to attract higher FDI inflows in to the country and a policy that will sustain the same over a long period of time. Protecting the domestic industry participants (from FDI, and hence competition) is only going to slow down the economic growth of the country.



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