Economy: OTHER SIDE OF FDI QUEST Santosh Kumar Mohapatra (My article published in Orissa post on July2. available under editorial- orissapost) The recent depreciation of rupee, plummeting stock market with concomitant current account deficit (CAD) has put the Government in a tizzy. The Government is mulling to do away with the 26 per cent cap on foreign direct investment (FDI) in all sectors, including defence and insurance, by raising the limit to 49 per cent. This means unfettered FDI hike in all sectors either by the automatic route or the approval route. This appears to be a wrong prescription for our economy. The problem of the current account deficit—the excess of imports over exports—is not due to inadequate liberalisation; and more FDI cannot curb it either. It is rather related to import of luxury items, gold and crude oil. India’s increased demand for vehicles, an offshoot of market economy, has increased the demand for oil, exacerbating current account deficit. The unjust global financial system favouring countries like the US and its dollar has made the matter worse. Uninhibited liberalisation or further easing of FDI norms will make our economy more vulnerable to global economical upheavals. Can the Government give a guarantee that by easing the FDI caps or unrepressed liberalisation, all such problem will be resolved and will never reappear? In reality, the problem will appear as our economy is not immune to the vicissitude of global economy. By withdrawing their investments from stock market, foreign investors want to bludgeon our country to formulate policies or expedite liberalisation to suit their purpose. Foreign investors can never be relied on, as their objective is only profit-maximisation. Our nation should not be made a hostage to foreign investors. Inflow of unfettered FDI is inimical to the nation’s interest. Too much of dependence on foreign investments may undermine the nationalist sentiments and goes against the fundamental concept of Indianisation fostered by the earlier planners in India. The thrust on FDI is potentially harmful as it can aggravate the current account deficit, since FDI sets up large continuous outflows of foreign currency year after year, well into the future. FDI may lead to quick economic growth in the short run, but it also transforms into a deep negative effect in the long run when repatriation becomes large. Further, the lurking danger is that foreign companies may rake in huge profits through siphoning and book management and repatriate funds which nullify the very purpose of FDI. Around 28 multinational companies in India caused a foreign direct outflow of Rs 15,368 crore in 2011-12, which was 7 per cent of the FDI of Rs 227,000 crore received by the country that year. It must be mentioned that such outflows are within the legal framework, and therefore it will be difficult for future Governments to remedy this. Using FDI to bridge the current account deficit is analogous to dependence on a Ponzi scheme to repay debt. Building exports like China and Germany is the only sustainable way to beat the current account deficit. Using gold for only jewellery and not for investment purpose will ease the problem. If around eight countries have current account surplus that depend almost entirely on imported oil, much like India, then why we cannot contain the current account deficit within 2 to 3 per cent of the GDP, which is good for the economy. While there is an ongoing debate on allowing or limiting FDI, surprisingly there is no such engagement with Indian direct investment abroad—i.e. outward FDI which reduces the net FDI. Since 2006, India’s investments abroad have grown manifold. The stock of outward FDI from India touched $112 billion at the end of 2011-12. Data shows that net Indian direct investment abroad in the last six years is over 50% of the net FDI that has come into India. Interestingly, the percentage is the same even for the last decade. Again, from the same perspective, the net outflow in the last six years is nearly 65% of the net inflow, showing the extent to which the contribution of FDI to shoring up India’s balance of payment is negated by outward investments. Again entry of FDI in large amounts depresses the profits of domestic business, leading to shrinking of investment pie of the economy in the long run. This implies that the FDI acts as a catheter which sucks the blood of the patients. Further, due to Double Taxation Avoidance Agreement (DTAA), FDI in India has become a conduit for tax evasion for both Indian and foreigner investors. FDI has become identical to round-tripping, laundering and reinvesting their loot—and is the biggest heist in history. However, it does not mean we should say no to FDI. Rather, emphasis should be laid on mobilisation of internal resources and domestic savings. FDI can be allowed if it comes under proper safeguards and in specific areas of genuine need, and on terms warranted by national interest. Inflow of FDI may be considered if it leads to infrastructural development, technological improvement, enhanced production, employment generation, promotion of exports and establishment of new industrial unit (i.e. Greenfield investment). However, FDI should be restricted to sensitive sector like telecom, strategic sectors like defence, and employment-generating sectors like retail. But FDI or any form of foreign capital should be prohibited in the financial sector such as banking, insurance and pension as it will help foreign companies/international finance capital to have greater access and establish their dominance, rather control, over our domestic savings; thereby, jeopardising our savings economy. The writer is an Orissa-based financial columnist
Posted on: Thu, 18 Jul 2013 17:44:47 +0000