Two wrongs don’t make a right
30 Jun 2013 4:58 PM GMT
Dollar shortage seems to have driven the government at its wits’ end. Otherwise, how could the government leave the task of making its intention public with a senior finance ministry bureaucrat regarding sweeping changes it plans to bring about in foreign equity control in Indian enterprises, all through the automatic route. The master-plan towards a new foreign direct investment (FDI) policy regime prepared by the finance ministry seeks to allow foreign equity up to 74 per cent in almost all areas of industry and trade, including highly sensitive telecommunications, banking, insurance, drugs and pharmaceuticals, multi-brand retailing and defence manufacturing.
Suffice it to say that such sweeping changes in FDI rules giving foreign equity investors nearly absolute control over the country’s manufacturing and services sectors are not without possible serious consequences on Indian economy. Ethically, there should be a full-scale debate in both the houses of Parliament to assess the mood of the nation on such a vital policy matter which, effectively, tantamount to selling the economy to foreigners. Only a few months ago, the government allowed FDI in multi-brand retailing up to 51 per cent and civil aviation 49 per cent.
Clearly, the move is symptomatic of economic ills suffering the nation and a desperate attempt by
the government to cure them by attracting FDI at any cost to prevent a balance of payment crisis caused by heavy capital outflows from the country due to wrong trade and investment policies. Two wrongs don’t make a right. If the earlier FDI policy, which failed to improve India’s global competitiveness in terms of products and services, was bad, the one the government is talking about is much worse. It will allow foreign investors almost unlimited opportunity to exploit the Indian market without any obligation to earn foreign exchange to cover their various repatriation schedules.
FDI is no charity. Foreign investment inflows will invariably lead to exchange outflows on various accounts from investing companies. Soon, those outflows will exceed the original inflows. The investing companies must engage themselves in exports to cover at least all their repatriation needs. Such regulatory practices have yielded extremely good results for countries such as China, Japan and South Korea. Logically, they should work as well for India, potentially the world’s third largest market after China and the US. Unfortunately, this is not happening in India, the economy of which continues to be highly import-led putting severe stress on its forex resources. The Reserve Bank (RBI) is under constant pressure to release Dollars to meet growing demands from importers – from petroleum, edible oils, fertilisers, coal, industrial raw materials, machinery and equipment and telecom gears to luxury products of sorts – and from domestic foreign travelers, some on genuine business grounds and others mostly representing highly Rupee-rich individuals on pleasure trips and on expensive undergraduate-level overseas education. Then, there is frequent large demands from foreign institutional investors (FIIs) booking profits at will out of their stock market operations and regular demands from MNCs operating in India on account of repatriation of profits, dividends, royalty, technical fees, consultancy fees, head office expenses, etc. The rising overseas debt servicing commitments of Indian corporates and government are adding further stress on RBI’s forex reserves.
With inflows of foreign exchange from incremental export earnings shrinking for almost 11 months in a row and foreign remittances into the country stagnating after reaching their peak in 2011-2012, RBI’s forex reserves have been hovering around an uncomfortably low level at $300 billion. If one takes into account the last year’s trade deficit of close to $200 billion and increasingly large net outflows on the capital account, the current level of foreign exchange reserves is already a matter of concern. RBI raised a red flag last year over the sharp increase in the country’s external debt estimated at $345.8 billion at the end of March 2012.
Understandably, RBI has been stressing the need for higher FDI inflows into the economy in view of the foreign debt concerns. But, RBI has neither the power nor the authority to formulate the country’s FDI policy although it can influence the FII policy in terms of the sources and quality of investments. The government alone can formulate and execute the foreign investment policies concerning FDI, FII and corporate commercial borrowings, including safeguards to protect the national interest.
‘External debt is likely to rise to bridge the financing gap. As a result, external vulnerability indicators may deteriorate and would make economy susceptible to external shocks, unless the trade balance is compressed and FDI flows improve,’ RBI had warned and added that ‘concerns about the domestic business environment appear to be weighing on FDI inflows as well.’ The emphasis is clearly on compression of trade deficit, which the government failed to achieve. On the contrary, the record 2012-2013 trade gap beat all earlier official export-import forecasts.
The government’s trade and investment policies continue to favour easy imports and unrestricted corporate repatriation while being aimless at exploring indigenisation and higher income from exports by linking them with foreign investment. These policies turned India into a dumping ground of investments in soft areas such as alcoholic and non-alcoholic beverages, bottled drinking water, kitchen appliances, trading in apparels and footwear to name a few and of junk foreign life-style products and cheap consumer items threatening to kill the domestic medium, small and cottage industry sectors.
India may have done away with its earlier foreign exchange regulation act (FERA) to ease restrictions on foreign investment and repatriation, but it would be foolish to surrender the responsibility of building the country’s economy to a bunch of profit hungry multi-national investors and traders having little respect for scruple. IPA
Suffice it to say that such sweeping changes in FDI rules giving foreign equity investors nearly absolute control over the country’s manufacturing and services sectors are not without possible serious consequences on Indian economy. Ethically, there should be a full-scale debate in both the houses of Parliament to assess the mood of the nation on such a vital policy matter which, effectively, tantamount to selling the economy to foreigners. Only a few months ago, the government allowed FDI in multi-brand retailing up to 51 per cent and civil aviation 49 per cent.
Clearly, the move is symptomatic of economic ills suffering the nation and a desperate attempt by
the government to cure them by attracting FDI at any cost to prevent a balance of payment crisis caused by heavy capital outflows from the country due to wrong trade and investment policies. Two wrongs don’t make a right. If the earlier FDI policy, which failed to improve India’s global competitiveness in terms of products and services, was bad, the one the government is talking about is much worse. It will allow foreign investors almost unlimited opportunity to exploit the Indian market without any obligation to earn foreign exchange to cover their various repatriation schedules.
FDI is no charity. Foreign investment inflows will invariably lead to exchange outflows on various accounts from investing companies. Soon, those outflows will exceed the original inflows. The investing companies must engage themselves in exports to cover at least all their repatriation needs. Such regulatory practices have yielded extremely good results for countries such as China, Japan and South Korea. Logically, they should work as well for India, potentially the world’s third largest market after China and the US. Unfortunately, this is not happening in India, the economy of which continues to be highly import-led putting severe stress on its forex resources. The Reserve Bank (RBI) is under constant pressure to release Dollars to meet growing demands from importers – from petroleum, edible oils, fertilisers, coal, industrial raw materials, machinery and equipment and telecom gears to luxury products of sorts – and from domestic foreign travelers, some on genuine business grounds and others mostly representing highly Rupee-rich individuals on pleasure trips and on expensive undergraduate-level overseas education. Then, there is frequent large demands from foreign institutional investors (FIIs) booking profits at will out of their stock market operations and regular demands from MNCs operating in India on account of repatriation of profits, dividends, royalty, technical fees, consultancy fees, head office expenses, etc. The rising overseas debt servicing commitments of Indian corporates and government are adding further stress on RBI’s forex reserves.
With inflows of foreign exchange from incremental export earnings shrinking for almost 11 months in a row and foreign remittances into the country stagnating after reaching their peak in 2011-2012, RBI’s forex reserves have been hovering around an uncomfortably low level at $300 billion. If one takes into account the last year’s trade deficit of close to $200 billion and increasingly large net outflows on the capital account, the current level of foreign exchange reserves is already a matter of concern. RBI raised a red flag last year over the sharp increase in the country’s external debt estimated at $345.8 billion at the end of March 2012.
Understandably, RBI has been stressing the need for higher FDI inflows into the economy in view of the foreign debt concerns. But, RBI has neither the power nor the authority to formulate the country’s FDI policy although it can influence the FII policy in terms of the sources and quality of investments. The government alone can formulate and execute the foreign investment policies concerning FDI, FII and corporate commercial borrowings, including safeguards to protect the national interest.
‘External debt is likely to rise to bridge the financing gap. As a result, external vulnerability indicators may deteriorate and would make economy susceptible to external shocks, unless the trade balance is compressed and FDI flows improve,’ RBI had warned and added that ‘concerns about the domestic business environment appear to be weighing on FDI inflows as well.’ The emphasis is clearly on compression of trade deficit, which the government failed to achieve. On the contrary, the record 2012-2013 trade gap beat all earlier official export-import forecasts.
The government’s trade and investment policies continue to favour easy imports and unrestricted corporate repatriation while being aimless at exploring indigenisation and higher income from exports by linking them with foreign investment. These policies turned India into a dumping ground of investments in soft areas such as alcoholic and non-alcoholic beverages, bottled drinking water, kitchen appliances, trading in apparels and footwear to name a few and of junk foreign life-style products and cheap consumer items threatening to kill the domestic medium, small and cottage industry sectors.
India may have done away with its earlier foreign exchange regulation act (FERA) to ease restrictions on foreign investment and repatriation, but it would be foolish to surrender the responsibility of building the country’s economy to a bunch of profit hungry multi-national investors and traders having little respect for scruple. IPA
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