India's top performance
Despite being the world’s top deal-street performer, India gets little in return
India's business houses and entrepreneurs are going all out to acquire companies across the world, thanks to the support from the government, RBI and banks. The global deal-street now seriously takes note of Indian bids and transactions. India's outward foreign direct investment (OFDI) in equity, loan and guarantees is largely funded by the Reserve Bank of India. Funds invested are large, running into billions of dollars, every year. Unfortunately, most of them generate little benefit for India, by way of corporate remittances. In contrast, foreign companies or MNCs operating in India remit profits — regularly and unfailingly — along with their other earnings such as technical fees, commissions, royalties, head office expenses, etc.
While the annual remittances to India by its diaspora in 2017 were around $69 billion, the highest among all nations, little is known about remittances by Indian corporates, their subsidiaries, and associates, or Indian MNCs abroad. According to RBI, India's Outward Foreign Direct Investment in equity, loan and guaranteed issue stood at US$ 784.28 million in February 2018 as against US$ 1.35 billion in February 2017. The total OFDI might have exceeded $10 billion, last year. Few know about their yield to India which supports such investments.
Lately, the UK announced that India is the third largest source of FDI for them. No doubt, it sounds impressive. But, what does India get in return from its OFDI investments? Indian firms, including their associates and subsidiaries, are making sizeable investments and employing thousands of people in their establishments in the US, UK, Germany, Israel, Brazil, Australia, Ireland, Finland, Portugal and several Afro-Asian countries. A lot of credit for OFDI goes to RBI which has relaxed the norms for domestic companies investing abroad by doing away with the ceiling for raising funds through pledge of shares, domestic and overseas assets.
In addition to joint ventures and wholly owned subsidiaries, RBI offers similar concessions for pledging of shares in case of step down subsidiary. RBI also rationalised guidelines for foreign investments abroad by Indian companies. It raised the annual overseas investment ceiling to US$ 125,000 from US$ 75,000 to establish JV and wholly owned subsidiaries. The RBI actions may look very encouraging, but they are not without risks. After all, largely import-dependant India does not have such foreign exchange reserves to continue with the luxury of liberally releasing funds for OFDI without caring for returns. The world's fifth largest economy by GDP, India occupies the eighth position in the list of countries by foreign exchange reserves, even below tiny Taiwan.
India's total foreign exchange (Forex) reserves stood at only US$426.0824 billion, including gold at US$21.4842 billion, SDRs (Special Drawing Rights with the IMF) of US$1.5406 billion and US$2.0794 billion reserve position in IMF as of April 13, 2018, says RBI's weekly statistical supplement published on April 20, 2018. Given the size of India's 'real' economy, massive import pressure, especially of oil, gold, consumer electronics and defence hardware, the country would have been in a little more comfortable situation if its foreign exchange reserves stood at around $1 trillion. For long, India has been living with large trade deficits and constant foreign borrowings to pay for its imports. India's external borrowing to GDP ratio is still very high compared to China. India had $474 billion in external debt as of 2015, representing 16 per cent of the Asia-Pacific region's total debt. This has since grown by almost $50 billion.
The Department of Economic Affairs (DEA) showed India's external debt stock at US$ 513.4 billion at end-December 2017, recording an increase of US$ 41.6 billion (8.8 per cent) over the level at end-March 2017. At end-December 2017, long-term external debt accounted for 81.0 per cent of India's total external debt.
India's liberal OFDI policy in favour of its companies is not sustainable unless it generates good or reasonable return on investment for the country. This explains why RBI has lately looking at the subject from a more realistic angle. RBI has now decided that only companies with proven track record will be allowed to invest in overseas subsidiaries and joint ventures. Such investments, under which a company in India could automatically remit up to four times its net worth abroad, have been misused by many to move capital and divert borrowed funds out of the country. Indian companies are clearly abusing the rule that was originally intended to enable Indian conglomerates set up businesses abroad through subsidiaries and joint ventures and borrow from banks to transfer funds overseas.
Forensic audits of companies following large bank defaults showed how the OFDI route was misused to siphon out money. A pharmaceutical company whose audit was recently completed was found to have invested large amounts in multiple subsidiaries in Africa. The investments generated little or no returns and no dividends were paid to the parents in India with almost all the subsidiaries and JVs reporting losses. The same may be said about an Indian telecom company, which transferred large assets to Africa on acquisition, bringing little benefit to either its shareholders or the country. The Indian regulators must scrutinise the annual performance reports of companies under OFDIs.
The banking regulator has served notices to many Indians amid concerns over round-tripping of funds and violation of rules on foreign borrowing. This was because overseas JVs and wholly owned subsidiaries of these Indian companies had invested in other Indian entities. The Central bank suspects that some Indian groups have used overseas arms to raise cheap dollar loans and bring back the money as foreign direct investment into local outfits owned by the same group. No country can put up with such malpractices by companies. It is time that both the government and RBI take a more realistic view of India's corporate expansion abroad and how it benefits the country.
(The views expressed are strictly personal)