Business Today

FDI: For Developing India Faster

In view of latest policy changes on FDI, India is being touted as one of the most open economies in the world.

Gunja Kapoor        Last Updated: September 9, 2016  | 20:45 IST

Gunja Kapoor
In view of latest policy changes on FDI, India is being touted as one of the most open economies in the world. Prime Minister Narendra Modi said that hiking FDI limits would increase employment and propel growth. However, FDI has received its share of criticism from multiple quarters including a prominent affiliate of RSS, the Swadeshi Jagran Manch. It is imperative that we examine the facts on the ground before becoming unduly apprehensive about the general welfare impact of FDI.

FDI is not new to India. We have always supported foreign investors to make India their home, and thereby contribute to India's growth story. Bata, a brand used by every Indian household across generations, has Swiss origins. Similarly, brands including Hindustan Unilever (Unilever), Gillette, Colgate, and Maggi are an integral part of the Indian social fabric to the extent that their country of origin is reduced to mere quiz trivia. While these foreign companies flourished in India driven by consumption, this did not pose a hurdle for their pure play Indian counterparts including Nirma, Topaz, Vicco Vajradanti, and Yippie. In fact, most domestic brand CEOs acquired managerial acumen during their respective stints at foreign companies.

It is important for us to accept that the pre-independence Swadeshi ideology cannot be applied as is in present times. Then, India had been under colonial oppression, plagued by imperialist policies, lagging behind the already industrialised West. Fortunately, the nation has moved ahead since then, garnering international recognition and a competitive market. We have infrastructure to support industries, talent to fuel innovation, enviable demographics to drive demand and, most importantly, investors willing to bet on India's growth story.

FDI benefits are characterised by increased capital inflow, domestic skill development, competitive markets, improvement in balance of trade, higher forex reserves, and building operational efficiencies.

Despite having it all, why are some of us insecure about FDI making inroads in the nation? Why is the place of origin of capital of such paramount importance? Why is FDI being synonymous with modern day economic colonialism? Why is the ability of FDI to create jobs not being taken into cognizance?

As per the AMP Report, the automobile sector, which attracted 6 per cent of the total FDI inflow in 2015, aims to create 65 million additional jobs, contribute more than 12 per cent to GDP, scale up exports to the tune of around 35 per cent of total output and thus make India an automotive hub by 2026.

Why our fear for FDI is more fictional than real

FDI does not impact domestic investment adversely: Indian markets are primarily driven by domestic investments. FDI in India increased by around 29 per cent in 2015/16 to $40 billion. However, it still forms around 1.8 per cent of GDP, as opposed to gross fixed capital formation being 29.3 per cent of GDP. When a foreign firm invests in domestic markets, it creates positive cascade effects by engaging with local vendors and distributors. This results in higher domestic investment, in both technology and human resources. Thus, while FDI route has opened, domestic investment would continue to grow with better technology, competition and subsequent spill-overs.

Groups opposing FDI fear critical sectors such as automobiles and power would be controlled by foreign investors, who will infuse capital and technology to enterprises set up in India. But is this enough for an enterprise to succeed in India? Maruti has seen multiple labour strikes; Nestle's market cap was eroded by almost $1 billion during a single session in June 2015, when Maggi was engulfed in a controversy. Foreign investors will have to provide favourable working conditions, comply with the law of the land just like domestic enterprises, and adapt to Indian industrial climate while they envisage long-term growth. FDI does not license investors to carry out business while exploiting national resources.

FDI will not exploit farmers: Impact of FDI on farmers has been an overused excuse for most groups that oppose foreign investments in retail, agriculture or allied sectors. FDI will certainly impact farmers, but not necessarily in a negative way. FDI benefits to farmers are expected to be similar to those experienced by MSMEs from ecommerce i.e. business continuity, access to capital and technology. (According to a report on Socio-Economic Value Addition of FDI in the E-Commerce Sector by Pahle India Foundation, around 44 per cent vendors cited guaranteed demand and 21 per cent cited access to credit as advantages of tie-up with ecommerce.)

FDI in agriculture would result in significant business continuity, as harvest would be purchased from farmers based on documented purchase agreements. MNCs would support crop protection, provide for technology to improve crop yields, and remove middlemen to a large extent.

FDI will not destroy small entrepreneurs: In the quest to attract FDI, the overall macro-economic climate is expected to be more business friendly. There has been continual focus on improving ease of business in the country, both, for domestic and foreign investors. India's ranking in Doing Business improved from 134 (2015) to 130 (2016). Other initiatives such as simplification of application process for industrial licence, time bound processing of applications, and eBiz platform to facilitate single window clearance are bellwether to improving business climate in India.

This is a positive cue for entrepreneurs, who struggle to work in a difficult business environment plagued by red-tapism and layers of regulations. It must be noted that Bank Credit to GDP ratio (BGCR) in India is around 52.6 per cent, much lower than other developing economies including Brazil (67.9 per cent) and China (155.3 per cent). With incumbent thrust on ease of doing business, there is huge opportunity for middle and low-size businesses to engage with MNCs than directly expose themselves to market risks.

Patanjali is a classic example of how product quality and pricing can outsmart global MNCs. Indian consumer is price sensitive and quality conscious. According to Philip Capital's report, Colgate-Palmolive, market leader in oral care, witnessed volume growth of about 2 per cent in 9M16, the slowest in five years, entirely due to the launch of Patanjali products. With Patanjali's distribution expected to ramp up in 2016, the ultimate leader, however, as per the report, will be one that grows on the back of strong culture of innovation and interprets Indian customer better.

Fringe groups using this as an opportunity to demonstrate their national fervour, there is a fine line between economic fundamentalism and protection. Looking beyond geographic boundaries for investment is eventually going to plough capital in India, create jobs in India and pay taxes is India.

The writer is Associate Fellow, Pahle India Foundation

 

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