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More realistic picture after revision

Optimists would say that one of the reasons for India attracting less FDI is that domestic firms provide much stiffer competition to MNCs than in other developing countries, says Abhijit Roy.

"A billion here and a billion there and pretty soon you're talking big money".

— Sen. Everett Dirksen, Attributed

THERE HAS been criticism that India has not been doing enough to attract foreign direct investment (FDI) into India. The perceived low level of FDI has been compounded by the fact that we have not been following international best practices in this area, and its method of arriving at inward FDI understated the actual inflow. The Government and the Reserve Bank of India had constituted a committee in 2002 to rework the FDI numbers. This committee submitted a FDI Compilation Report, and based on this report a Technical Monitoring Group (TMG) was constituted in November 2002 for implementation of the recommendations made by the Committee. The main focus of the TMG was to identify various components of FDI, that are operationally feasible and capture these components in a specified institutional framework and within a specified time period. The TMG submitted its first Action Taken Report on June 27, 2003. After reviewing the international best practices as also some select country experiences, the TMG decided to include 14 items in Indian FDI data under three major heads. The items were:

A. Equity Capital: (1) Equity capital of unincorporated entities; (2) Non-cash acquisition against technology transfer, plant and machinery, goodwill, business development and similar considerations; (3) Control premium; (4) Non-competition fees.

B. Reinvested Earnings: (5) Reinvested earnings of incorporated entities; (6) Reinvested earnings of unincorporated entities; (7) Reinvested earnings of indirectly held direct investment enterprises.

C. `Other capital': (8) Short-term and long-term inter-corporate borrowings; (9) Trade credit; (10) Suppliers' credit; (11) Financial leasing; (12) Financial derivatives; (13) Debt securities; and (14) Land and buildings.

Data under `Other Capital' relate to short-term and long-term borrowing, trade credit (more than 180 days), suppliers' credit (more than 180 days), and financial leasing.

The TMG has decided that at the first instance, out of these 14 items, the FDI data will not include six items, namely, non-cash acquisitions, reinvested earnings of indirectly held direct investment enterprises, short-term trade credit, financial derivatives, debt securities and land and buildings. The feasibility of including the remaining items would be exIplored in future.

Revision of data

In line with the explanation given above, the revised data (which are at present provisional) for 2000-01, 2001-02 and 2002-03 are shown in Table I.

Given the above revisions, can one conclude that India's efforts in attracting FDI during the last decade have succeeded? Unfortunately, the answer continues to be negative. FDI into India is only about one per cent of its GDP. During the last few years, FDI into developing countries has been above $200 billion a year. Hence, even with the upward revision of data, India's share is only 2-3 per cent of FDI into developing countries. Countries like China, Mexico and Brazil continue to attract far more FDI.

Optimists would say that one of the reasons for India attracting less FDI is that domestic firms provide much stiffer competition to MNCs than in other developing countries. Perhaps that is true to some extent; however, the fact remains that there are huge areas in the Indian economy including the infrastructure sector that require substantial investment as well as technological upgradation. In some areas the political-bureaucratic nexus has effectively doused the fervour of foreign firms, while in others domestic firms have lobbied successfully with the Government to prevent the entry of foreigners. In sectors like power, high off-take risks have discouraged FDI.

FDI by India

Similar to the case of FDI into India, figures in respect of FDI by India (Indian investment abroad), so far reported in the Balance of Payments (BoP) statistics, comprised mainly the equity component. Since the data on FDI into India have been revised according to the best international practices, the Government felt a need to compile corresponding data on Indian investment abroad. Accordingly, comparable data on Indian investment abroad that include equity capital, reinvested earnings and `other capital' have been compiled for fiscal 2000-01, 2001-02 and 2002-03 (Table II).

With India becoming part of a globalised world, Indian companies cannot afford to remain domestic players. The software industry was the first to go globally mobile, followed by pharmaceutical companies. Recently ONGC, backed by the Government, became an active investor buying stakes in foreign oilfields. This is in line with the country's strategic long term interests as India is expected to remain a major oil and gas importer. The coming years should witness an increasing number of domestic companies venturing abroad. This shift has also been made possible because of a burgeoning foreign exchange reserves position.

Implications for BoP

It may be added here that the revision of FDI data will not affect India's overall BoP position, that is, the accretion to foreign exchange reserves would not undergo any change. However, the composition of BoP will undergo changes. As a result, the current account surplus during 2001-02, which amounted to $1.4 billion, has been revised to a surplus of $800 million. Furthermore, the current account deficit during 2000-01 has increased from $2.6 billion to $3.6 billion.

At the end of the exercise, given the size of the economy, nothing substantial has emerged. However, the data compiled by the Government/ RBI in the coming years will reflect a more realistic position of FDI (both inward and outward), and the extent of contribution of both MNCs and domestic firms in cross-border investments involving India will be acknowledged in a more transparent manner.

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