Calcutta Notebook


The Congress-led UPA Government persists in putting all its eggs in the FDI basket despite its dismal failure in jumpstarting growth with the support of MNCs. Commerce Minister Anand Sharma recently proclaimed: "The government will continue its endeavour for liberalizing the FDI policy further in the coming weeks to ensure that India retains its leadership position for attracting foreign investments." The Foreign Investment Promotion Board has recently cleared the application for FDI in retail by Tesco which has applied with the Tatas. The Government has relaxed FDI norms in several sectors including telecom, defense, PSU oil refineries, commodity bourses, power exchanges and stock exchanges in the recent period. But FDI taps are still dry. More importantly, some major MNCs have exited from India. Posco and Arcelor Mittal have cancelled their plans to invest in India due to local opposition and difficulties in acquisition of land. Oil major BHP Billiton has withdrawn from oil exploration because of delays in obtaining clearances from the Ministry of Defense. There is no need to worry about this reluctance of MNCs to invest in India.

A study by Narayan Sethi, Assistant Professor in Economics at National Institute of Technology, Rourkela found that FDI is positively correlated to the economic growth of Bangladesh but negatively correlated to the economic growth in India. In both cases the role of FDI was weak; not deep and strong. Another study by Sarbapriya Ray of University of Calcutta found that there was positive relationship between FDI and GDP. But she found unidirectional causality which runs from economic growth to foreign direct investment. This means that FDI was coming in after economic growth was taking place for other reasons. Yet another study by Rudra Prakash Pradhan of Indian Institute of Technology, Kharagpur found a positive relationship between FDI and economic growth in Singapore and Thailand but not in Indonesia, Malaysia and Philippines. These studies indicate that the impact of FDI on India's economic growth is uncertain and may even be negative.

Other supposed beneficial effects of FDI are not convincing either. First effect is said to be of advanced technology. It is true that quality of goods produced in the country has much improved after opening of the economy in 1991. This can be seen most clearly in the improvement in quality of cars. However, the same technological advancement would most likely have taken place if India had opened the sector to domestic competition. Tatas and other businessmen had been seeking licenses to manufacture cars. The Government refused to give them licenses and protected the monopoly of Hindustan Motors and Walchand. It was this monopoly that enabled these companies to sell outdated models. It is necessary, to make a technology audit before clearing FDI proposals. Much FDI is coming for harvesting brand value without adding substantially to quality of goods. Such FDI should not be encouraged.

The beneficent impact of FDI on capital is also suspect. Knowledgeable persons tell this writer that a large part of FDI in India—maybe around eighty percent—is actually Indian black money that is being round-tripped. Black money is sent out of India and comes back in form of white FDI. Indians are sending large amounts to be deposited in Swiss Banks and other tax havens. Indian economy is like a big broken pot. Large amounts of money are flowing out from the holes at the bottom. Lesser is being filled in from the top. Yet the Government is focused on increasing the smaller inflow from the top; and dilly dallying in taking measures to stem the outflow from the bottom. It will not do to seek foreign capital when India's very own capital is seeking an exit. So Indians have reasons to heave a sigh of relief with the exit of MNCs from India. Maybe this will force the Government to rectify the red tape and corruption which is the main obstacle to investment and growth.

What about China? True that China's growth rate is high and it has attracted huge amounts of FDI. But there are three factors that must be taken into account. China had destroyed its tradition of entrepreneurship during thirty years of Maoist rule. It needed to attract MNCs to bridge this entrepreneurial deficit. India does not have such a deficit. Secondly, China's domestic savings rate at about 40-45 percent appears to be the main driver of economic growth. China could have attained similar high growth rates-even more-if it had abstained from FDI. Third, China has embarked on a policy of environmental destruction to attain high growth rates.

The Government's objective is to somehow attain decent growth. The Government is unwilling to improve governance though. Corruption in high places grows everyday. The Government is unable to persuade domestic entrepreneurs to invest in India. Indian businessmen are more inclined to invest abroad. The Government is trying to cover up this outflow of domestic capital by bringing in FDI.

Many other studies indicate that FDI has a positive impact if domestic institutions are strong. This finding actually makes a case against FDI. If domestic institutions are strong then domestic capital can be easily mobilized in a large country like India. The Government must realize that there is no shortcut to growth. The only way forward is to improve governance, reduce rent-seeking by politicians and bureaucrats and invest in infrastructure.

Vol. 46, No. 30, Feb 2 - 8, 2014

Your Comment if any