Investors counsel us that FDI can change a country’s economy, turn an India into a China. India has replaced China as the highest-ranked foreign destination for investments, attracting $63 billion worth of FDI projects in 2015. With giants like FoxConn and GE agreeing to invest in multi-billion dollar projects, this seemingly rapid growth of greenfield FDI in India holds great promise. In these times of ‘Make in India’, with efforts under way to get rid of red tape, over 98 per cent of the FDI comes through the automatic route. No wonder 2.25 lakh jobs were created in 2015.
But to see this decadal cyclical trend as an index of the revival of India’s investment cycle would be premature. Disaggregating this data reveals a different picture. India attracted $31 billion of FDI in H1 2015, but the gross inflow stood at just $20.4 billion after deductions for repatriation and disinvestment. Also, the extraordinary global monetary easing, with negative interest rates, has fuelled financial asset markets in Asia and Latin America. This leaves India and other emerging markets far more susceptible to a decline in global excess liquidity, given a rise in interest rates or a pick up in the US economy.
So far the rising FDI has sought to target domestic demand instead of supporting Make-in-India exports—68 per cent of the inflow is to sectors such as IT, telecommunications, e-commerce, cash-and-carry, trading and automobiles. Since 2013, venture capital and private equity (VC/PE) funds have increased their exposure substantially in the areas of consumer technology (growing by 250-300% in the last two years) and BFSI (banking, financial services and insurance)—nearly half of the top VC/PE deals in 2014 and 2015 were in consumer technology.
On the other hand, sectors that are investment-oriented (metals, power, oil and gas) or employment-oriented—construction (9.3 per cent of FDI in 2015) or hotels and tourism (3.2 per cent of FDI in the same year)—have seen muted growth or even sharp decline. The steep rise in consumer electronics imports since 2010 indicates that e-commerce investments are stimulating imports over domestic manufacturing or exports. Net exports in software services have declined to five per cent in the last three years.
More often than not, promised money has not been forthcoming. In 2013, ArcelorMittal scrapped its 12-million-tonne steel plant in Orissa, with a promised investment of Rs 50,000 crore, because of issues with land acquisition and iron-ore block allocation. Augere Wireless paid Rs 125 crore for 4G licences and sought to invest Rs 270 crore over three to five years, and then sold 4G spectrum in two states and quit India by May 2012. AES Power, having invested $143 million for a 49 per cent stake in Odisha Power Generation Corporation, wound up its India operations by November 2011, citing hurdles in the power sector. Telecom companies like Etisalat and financial firms like 3i, UBS and the Royal Bank of Scotland have withdrawn from India after signing grandiose MoUs. Mining giant Vedanta promised Rs 100 crore to Bihar in 2012 for investments in healthcare and education but not a single rupee has reached beneficiaries yet.
Besides the gap between projects announced and projects implemented, there is also the matter of “in-progress” projects being stalled—the value of stalled projects in March 2016 was 11.4 trillion rupees, the highest ever in relative and absolute terms, accounting for 16 per cent of all projects under implementation. Surprisingly, projects are stalled not because of land issues, statutory clearances, availability of funds or raw materials, but due to “lack of promoter interest”.
Clearly, some of the corporate announcements are made with a ‘rent-seeking’ mentality and for photo-ops, leaving the government and job-seekers in the lurch. More hype than reality, it is always advisable to take news of a “successful” summit with a pinch of salt. Only a small proportion of the investment pledges actually fructify; the “success” rate was 11 per cent for Uttar Pradesh, six per cent for West Bengal, three for Karnataka, one for Jharkhand and nil for Orissa.
The share of FDI in gross capital formation in India has declined despite investment rate falling from 14 to nine per cent between 2007 and 2015.
Take West Bengal’s recent investment summit for instance. Of a total investment proposal of Rs 2.43 lakh crore, a significant majority came from the central government, while another Rs 84,000 crore were outlays for housing and industrial parks. UP, with its law and order issues, seeks FDI to “Make in UP”, while the existing industrial units face infrastructural, procedural and legal issues. But capital flight has increased, with Tata Motors partly shifting production to Uttarakhand, given delayed delivery of incentives promised under the State Industrial Policy 2006. While the past decade saw the Agra and Taj Business Summit organised, the Noida-Greater Noida belt has failed to see a single large industrial project.
Similarly, Orissa faces a dismal industrial scenario despite its mineral resources and a history of big-ticket FDI proposals such as the $12 billion Posco steel project. It saw a drop of 81 per cent in FDI in FY2015, while attracting just $5 million of FDI (April-December 2015), less than the declared personal wealth of BJD ministers in 2014.
FDI in manufacturing is yet to make an impact. The sector got less than a third of the FDI flows between 2000 and 2012, most of it concentrated in drugs and pharmaceuticals. Such inflows did not necessarily lead to manufacturing: Sony India shut down its operations in 2004-05 and engages primarily in selling imported products; Samsung India suggests that its ratio of “own production” sales to “traded items” was 13:1, but imported raw materials and components accounted for three-fourth of the total cost, making it an assembler rather than a manufacturer.
A number of factors are responsible for this shortfall, but inefficient taxation is foremost. South Asian economies have taxed FDI investments imaginatively to promote growth of strategic industries, but India imposed MAT (18.5 per cent) and dividend distribution tax (DDT) of another 10 per cent in FY2012 on SEZ FDI, with remaining income-tax benefits negated by countervailing duties imposed by the WTO (33 till date). Implementating the parliamentary standing committee decision on restoring tax benefits to SEZs will provide some relief, but most FDI projects in manufacturing have so far failed to gather steam for want of infrastructure (rail /road /ports) or statutory clearances.
FDI is the not a cure-all for our developmental challenges. Its share in world capital formation has declined from 14 to nine per cent (2007-15). In India, too, its contribution to gross capital formation declined from 11 per cent to five per cent in 2015, despite investment rate falling from 39 to 30 per cent and a much-reduced savings rate (29 per cent instead of the earlier 37 percent).
The role of FDI and other external funds in boosting the domestic investment cycle has shown a declining trend globally. Most of the $1.2 trillion that India needs to invest as capital expenditure in its cities over the next 20 years can be raised by tapping municipal finance—monetising land assets, raising property taxes, instituting user charges to reflect costs, debt financing and public-private partnerships—along with State funding.
As policy frameworks converge across the world, developing a policy set for India with unique sector-specific factors to help create sustainable global assets will be key to attracting long-term investments. MoUs from investment summits and equity inflows, hyped for media play, will continue to be fickle and prone to withdrawal. FDI that builds infrastructure and launches industrial projects will be here to stay for the long term.
Foreign direct investment by the US in India is just half the amount that Indians pay to American colleges and universities. In the last financial year, there were 1.3 lakh students from India studying in the US and they paid a total of $3.6 billion in fees and other expenses. During the same period, the FDI that flowed to India from the US amounted to a total of $1.8 billion. The ratio was almost the same in the previous few years.