FDI reforms: A lot of concerns remain

Reform has become the new buzzword. It’s not merely a cliché. It covers a range of consequences over the economy from reduction in red tape leading to higher productivity, to a set of policies making it easier to do business, to transferring public wealth to private hands. Reforms, specially under the present government, have largely come to mean the latter.

Reforms are urgently needed in several areas where the need for better use of national resources is largely ignored. In education, health or keeping our rivers clean, major reforms are needed in the way that resources are allocated or in governance, but these are largely ignored. Instead foreign direct investment, or FDI, is the new catchword, as if we can sail forward only if these foreign resources come in.

Though FDI has moved up to $37.5 billion in 2015-16 (till February), it is still less than two per cent of GDP. In 2015, India’s total inward FDI stock was around $282 billion, while in 2015 alone China pulled in $310 billion FDI inflows. The combined FDI stock of China is around $2.7 trillion, about 10 times that of India. Manufacturing doesn’t attract much FDI. Government figures show that services attracted the most ($5.95 billion) in the first 11 months of 2015-16. It was followed by computer software and hardware ($5.83 billion), trading ($3.67 billion) and automobiles ($2.44 billion).

But FDI isn’t necessarily a one-way street. Royalties and dividends must be paid and these can be substantial. Net outflows on investment income and principal payments rose from $4.7 billion in 2001 to $25.1 billion in 2014-15, compared to FDI of $37.5 billion in 2014-15.

The government’s latest announcement on opening up FDI in nine areas is not a new direction but a continuation of previous policy. Realising that India’s corporate sector wasn’t investing in new productive capacity or was tied up in knots with infrastructure running at a loss, and the public sector being discouraged from investing in new projects, made the Narendra Modi government put its faith in FDI. This was first heard in the Prime Minister’s first Independence Day speech in 2014 where he extorted foreign companies to “make in India”, and was reiterated to foreign governments and companies in his frequent travels worldwide, again repeated while inviting defence contractors to set up shop in India and made into a policy announcement after RBI governor Raghuram Rajan decided he wouldn’t seek a second term.

The NDA government is following the “reform” path set by its UPA predecessor, but is more ready to sell public resources to corporates, including foreign ones. The latest announcement follows a pattern. Defence is the most troubling. Foreign companies are allowed to own as much as 100 per cent, up from 49 per cent announced recently. The defence sector FDI limit was also made applicable for manufacturing of small arms and ammunition. Obviously large armament companies don’t want their trade secrets not being under direct control, which a minority stake implies, and this view is reinforced by the very low levels of promised investment in defence. It seems more sensible to engage big Indian corporates like L&T, Tatas, Reliance and Mahindras, who have the required technical skills, in defence production but buy whatever high-tech items like aircraft from foreign manufacturers as is being done now.

When a former defence minister, A.K. Antony, maintains that “allowing 100 per cent FDI in defence means India’s defence sector is thrown mostly into the hands of Nato-US defence manufacturers”, he should be taken seriously.

Another big area opened up is single-brand retail for products that have “state-of-the-art” and “cutting edge” technology. This would suit Apple, which has avoided opening a manufacturing unit in India but is keen to open retail outlets. The computer and phone giant is likely to set up 10 to 15 large-format premium outlets.

Civil aviation is another contested area. While no one can reasonably object to loss-making Indian airlines taking on a foreign investor to raise capital as Jet Airways tied up with Etihad, the opening up of airports is a little problematic. Barring a few, very expensive airports in New Delhi, Mumbai, Bengaluru and Hyderabad, all the airports are owned by the International Airports Authority of India (IAAI) and sit on valuable land. The fear is that IAAI would be compelled to sell its rights to operate airports for a song. This despite the fact that IAAI runs the airports efficiently and maintains them well, and need not be replaced.

Another area of concern is pharmaceuticals. The Indian pharma industry has built up an enviable reputation across the world, selling medicines at prices affordable in India and to poor third world countries. No one can object to 100 per cent FDI under the automatic route being permitted in greenfield (new factories) pharma. By allowing foreign companies to take over existing units by buying 74 per cent equity under the automatic route could mean the industry will be made vulnerable.

Also inexplicable is FDI’s easy entry into food products made in India, broadcasting carriage services, private security agencies and animal husbandry sectors. Foreign investment in these areas is novel and unnecessary and allows in foreign marauders without their bringing in any special technology or skills.

Life was made difficult for RBI governor Raghuram Rajan by certain BJP members and with the Prime Minister’s Office applying pressure on him to reduce interest rates. That would have been another gift to corporate interests. He preferred to leave. As if to counter the effect that his departure would have on foreign investments, the new FDI package was pulled out of a hat, with still uncertain consequences for the country’s long-term interests.

The writer is a Mumbai-based freelance journalist