India: Recent Trends In FDI

2003

Raghbendra Jha

Conventional wisdom has it that foreign direct investment (FDI) flows to India have not been commensurate with her economic potential and performance. Invariably comparisons with China are made. Recently several problems of comparability have been noted. Towards rectifying some of these, the Government of India revised (starting November 2002) its computation of FDI figures in line with the best international practices and pursuant to the recommendations of a committee set up to examine this issue. Both inflow and outflow figures were revised to better reflect equity capital (including equity capital of unincorporated entities, control premium and non-competition fees); reinvested earnings (consisting of earnings of incorporated and unincorporated entities and reinvested earnings held directly by investment enterprises); as well as other capital (consisting of short-term and long-term inter-corporate borrowings, trade credit, suppliers credit, financial leasing, financial derivatives, debt securities, land and buildings). The adjustments are noted in Table 1.


 

FDI Inflows

 

2000-01

2001-02

2002-03

Unrevised figure (US$ billion)

2.34

3.90

2.57

Revised figure (US$ billion)

4.03

6.13

4.67

Adjustment (per cent)

72.2

57.2

81.7

 

FDI Outflows

 

2000-01

2001-02

2002-03

Unrevised figure (US$ million)

514

639

459

Revised figure (US$ million)

757

1390

1049

Adjustment (per cent)

47.2

117.5

128.5

These adjustments are remarkable, although even with the revised figures, Indian FDI figures fall well short of the Chinese figures. However, doubts about treating the Chinese FDI magnitude as an indicator of economic performance have been raised in a new book 'Selling China: Foreign Direct Investment during Reform era' (New York: Cambridge University Press, 2003) by Harvard University’s Yasheng Huang. In particular, he cites the better microeconomic performance of some leading Indian firms. Suma Athreya and Sandeep Kapur in 'Private Foreign Investment in India: Pain or Panacea?' (The World Economy, 2001) caution against associating higher FDI with better economic performance.

In a country such as India where tariffs remain high and the domestic market is large, FDI might flow in just to take advantage of the tariff walls. Such FDI has to be distinguished from FDI that promotes higher exports and encourages technological spillovers. The Federation of Indian Chambers of Commerce and Industry (FICCI) has recently outlined a number of procedural steps to facilitate enhanced FDI inflows. What is more important is enhancing the quality of FDI. To ensure that FDI is productivity and export enhancing, tariffs should be brought down faster to deter FDI merely wanting to produce behind tariff walls. To prevent FDI from merely substituting for domestic firms, a more vigorous domestic privatization policy needs to be pursued.

WATCHPOINT: The government might change its policy so that foreign investors may not have to be bound by what they had originally committed to, if the worrisome FDI norms were to be done away with. This policy change is expected to be announced soon.

 

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