The Govt’s New FDI Reforms Might Be Great For India, But This Is What Worries Me

Posted on June 28, 2016 in Business and Economy

By Anwarul Hoda:

“In two years, Govt brings major FDI policy reforms in several key sectors… India now the most open economy in the world for FDI; most sectors under automatic approval route,” the Prime Minister has said in tweets.

With further liberalisation in the Indian economy through foreign direct investment (FDI), there is a sense of confusion and insecurity among Indians has risen and that seems obvious because of a low level of integration between Indian economists and the general population.

FDI, in non-economic terms, is all about letting foreign companies set up shop in India, either alone or by hooking up with existing Indian companies. The condition for foreign investors is to have an ownership right of at least or equal to 10% of shares in an investing destination like a company or industry for it to be considered as FDI. With this provision, investors also get voting rights and the right to interfere in management.

With this brief introduction, we can now come to the flow of FDI in India and its effect on the economy. After the 1991 economic reform, there were several efforts taken by the Congress as well as BJP-led governments to liberalise and expose the Indian economy to the world. FDI is considered as one of the effective measures in the process of liberalisation.

The very recent reform brought by central government was for nine different sectors including defence, pharmaceuticals and aviation. Investment in these sectors has been revised with some major changes. The current NDA government which was opposing FDI while in the opposition is now encouraging major reforms.

The limit of FDI has been increased to 100 percent from the previous 49 percent in airlines. In a statement from the PMO it was said, “As per the present FDI policy, foreign investment up to 49 per cent is allowed under automatic route in scheduled air transport service/domestic scheduled passenger airline and regional air transport service. It has now been decided to raise this limit to 100 per cent, with FDI up to 49 per cent permitted under the automatic route and FDI beyond 49 per cent through government approval.”

In the pharmaceutical sector, which is also the third largest sector of the world in terms of volume (size), the limit has been increased to 100 percent with government approval. However, 74 percent can be owned through automatic route. Defence is another sector in which reforms were expected. With the government announcement, several global defence companies expressed their intention for setting up their manufacturing base in India as reported by the Indian Express. Cent percent FDI is also allowed in sectors like food processing, produced and manufactured food commodities, in e-commerce and in the broadcasting sector like DTH, cable network, mobile and television.

While praising its effort in reforming the economy in terms of FDI, the PMO said, “The Centre has radically liberalised the FDI regime, with the objective of providing major impetus to employment and job creation in India. This is the second major reform after the last radical changes announced in November 2015. Now most of the sectors would be under automatic approval route, except a small negative list. With these changes, India is now the most open economy in the world for FDI.”

However, there is concern among the general population whether FDI will bring employment and prosperity to them. And if yes, then to what extent and at what cost.

In any economy whose saving-investment ratio is low or is in a low-level equilibrium trap, FDI is considered as a master plan to deal with it as it will raise the current investment level, which will be helpful in capital building and ultimately generate output, employment and income. A higher growth rate is something which it is expected to achieve. India, in spite of being the third largest economy in terms of gross domestic product (GDP), has a low saving-investment ratio as a large number of its households live just above the poverty line and hence little savings are expected. So, India needs FDI not only for capital development but, more importantly, for technology for making our products more competitive.

“We’ve made sure foreign equity inflows are given a clear direction with the objective of ‘Make in India’. Our focus clearly is on creating jobs and ensuring that India becomes a manufacturing hub,” said Nirmala Sitharaman, Minister of State for Finance and Corporate Affairs said to media persons.

But we also have to keep in mind that no investors invest for charity. Investment in economics is all about making and maximising profit especially when it is coming from the private sector. And, hence, there is always the possibility of exploitation by foreign companies. As Sitaram Yechury in his reaction to the FDI liberalisation said, “Whatever is done, is against the country. Neither is it favouring the economy nor the people of India. It is the way to make profits by foreigners in India and the government is supporting them all.”

Meanwhile, former Defence Minister A.K. Anthony said that 100 percent FDI in defence is a “big threat” to the country’s security. Whereas Jairam Ramesh described the relaxation in FDI “a panic reaction to show the world that it is business as usual even after Raghuram Rajan has announced his exit”. As the Congress-BJP war of words rages over 100 percent FDI in defence, defence analyst Ajai Shukla said in a tweet that 100 percent FDI in defence was mere wordplay as it had been allowed since UPA under approval route for ‘state-of-art’ technology and now allowed for ‘modern technology’.

However, with the fullest liberalisation, threat looms over domestic producers and companies. Now, local companies have to compete with the foreigners in their own land. The foreign companies are generally the technologically advanced. So, they will be able to produce and sell at lower prices that might force domestic producers to exit.

The reform in FDI may bring prosperity for the time being but it is not the ultimate therapy. We have to depend on our own for long-term development. With different policies and strategies, the government needs to enhance and develop our manufacturing and producing sectors so that in future we can reduce our dependence on FDI. Such policies will be required by which we can exploit FDI to strengthen our producers by learning their technologies. FDI can be a boon or a bane. But it depends on the government’s policies and regulations. We need to keep an eagle eye on all such economic activities.

Featured image credit: Noah Seelam/AFP/Getty Images.
Banner image for representation only: Sameer Sehgal/Hindustan Times via Getty Images.