April 19, 2021

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Impact of Economic Reforms through Relaxed FDI on inclusive growth in India

Indian economy initiated openness in 1985 in its first phase; but on 24th July 1991...

Indian economy initiated openness in 1985 in its first phase; but on 24th July 1991 it opened its doors for the world, as it adopted New Economic Reforms. Liberalization of foreign investment policy has been a central component of economic reforms in India, introduced in 1991. It has been of an on-going nature, and the process is continuing even today. Domestic savings in India have not been large enough to meet wholly the investment requirements therefore, capital inflows from other countries, particularly of an investment nature, have become imperative. The investors also bring along best global management practices. As large amount of capital comes in through these investments, so, more and more industries are set up. It helps in increasing employment as well as international trade.

Objectives of the research paper :-

It is mainly concerned with proper policy formulation for FDI and effective implementation of the policies.  The paper depends on secondary data.The study attempts to analyse the important dimensions of FDI in India.The paper has been divided into five sections:- First section deals with liberalisation process. Second section delineates the implications of FDIThird section of the paper attempts to discuss the relaxed FDI policy and the latest moves of the government to allow FDI in some new sectors. Fourth section deals with the effects of these changes on promoting inclusive growth in Indian economy. Fifth Section discusses suggestions to promote inclusive growth with the help of FDI and conclusion.

First Section:-

 The Liberalisation Process refers to the ongoing economic reforms in India which started on 24 July 1991. After Independence in 1947, India embarked upon the path of planned development in a mixed economy and vanguard role was given to public sector. As the govt controlled economy became inefficient, non-competitive, protected and therefore high cost, attempts were made to liberalise the economy in 1966 and 1985. The first attempt was reversed in 1967. The second major attempt was made in 1985 by the then Prime Minister Rajiv Gandhi, which came to a halt in 1987. As India faced its worst ever financial crisis, balance of payment crisis, high inflation rate (16.7%), high fiscal deficit, high unemployment rate and other odds, therefore, it had to undertake The New Economic Reforms known as The New Economic Policy (NEP) on 24 July 1991 as part of a bailout deal with the International Monetary Fund (IMF) in the government of PV Narasimha  Rao and his finance minister Manmohan Singh. The neo-liberal policy included opening of international trade and investment, deregulation, initiation of privatisation, tax reforms, and inflation-controlling measures. Thus, unlike the reforms of 1966 and 1985 the reforms of 1991 proved sustainable.

The fruits of liberalisation reached their peak in 2007, when India recorded its highest GDP growth rate of 9%. With this, India became the second fastest growing major economy in the world, next only to China, which has been liberalising its economy since 1978.

But, the growth rate slowed significantly in the first half of 2012, as India’s Gross domestic product (GDP) growth rate became lowest in 2012-13 over a decade, growing merely at 5% compared with 6.2% in 2011-12. On 28 August 2013 the Indian rupee hit an all time low of 68.80 against the US dollar. India’s economic reforms were criticised, as the policy apparently failed to address poverty-reduction, employment growth, export growth and thereby leading to a worsening level of current account deficit compared to prior to the reform period. Since 1992, income inequality has deepened in India.

 Second section- implications of FDI:- FDI is a non-debt, non-volatile investment and thus helping the development of country. The paper tries to find out how FDI is seen as an important economic catalyst of Indian economic growth by stimulating domestic investment, increasing human capital formation and by facilitating the technology transfers. It is a pre-dominant and vital factor in influencing the process of economic development. FDI refers to capital inflows from abroad for investment in economy or to enhance the production capacity of the economy.Foreign investment can be divided into :-

(i)direct foreign  investments or long period investment 

(ii) in-direct foreign investments known as portfolio investments or Foreign Institutional Investments (FIIs), wherein overseas institutions invest in equities listed on a nation’s stock exchange.

Third Section- the FDI policy:- This section undertakes a review of India’s FDI policy framework. A foreign company planning to set up business operations in India may in- corporate a company under the Companies Act 1956, as a Joint Venture or a Wholly Owned Subsidiary. Foreign investment in India is governed by the FDI policy announced by Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999.

An Indian company can receive Foreign Direct Investment under the following two routes:-                (i) Automatic Route:-FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities / sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time. The investors are only required to notify the concerned regional office of the RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days.

ii.Government Route:-FDI requires prior approval of the Government, the Foreign Investment Promotion Board (FIPB), the Secretariat for Industrial Assistance (SIA) and the Foreign Investment Implementation Authority (FIIA).

 The Indian company having received FDI either under Automatic route or Government route is required to comply with provisions of the FDI policy including reporting of FDI to the Reserve Bank. .

The following table exhibits trend and fluctuations in FDI flows in India from April 2000 to December 2012 and provisional data for 2013 & 2014 in post-liberalised period on year-wise basis. During 2006-07, FDI inflow increased tremendously, as the growth rate is 146% during the period.

Year-wise data FDI (amount in US $ millions)

 

 

 

FDI Flows In to India

 

Sl .Nos

Years

Total

% GROWTH

FII Net

1

2000-01

4029

 

1847

2

2001-02

6130

(+)52%

1505

3

2002-03

5035

(-)18%

377

4

2003-04

4322

(-)14%

10918

5

2004-05

6051

(+)40%

8686

6

2005-06

8961

(+)48%

9926

7

2006-07

22826

(+)146%

3225

8

2007-08

34843

(+)53%

20328

9

2008-09

41873

(+)20%

(-)15017

10

2009-10

37745

(-)10%

29048

11

2010-11

34847

(-)08%

29422

12

2011-12

46556

(+.)34%

16812

13

2012-13(P)

36860

(-)21%

27583

14

2013-14(P)

11709

 

 

Source:- RBI_s Bulletin September, 2013 dt. 10.09.2013 (Table No. 34 – FOREIGN INVESTMENT INFLOWS).

 

The Relaxed FDI  Policy :-To attract more foreign investment, the Government  adopted relaxed FDI  policy. The Government of India has liberalised the FDI regime in various main sectors in 2012 & 2013.

(1)  FDI in Retail- the government opened up the retail sector slowly to Foreign Direct Investment. In 1997, FDI in Cash and Carry (wholesale) with 100% ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51% investment in a single brand retail outlet was permitted in 2006. It led to direct entrance of companies like Nike, Reebok, Metro etc. or through joint ventures like Wal-mart with Bharti, Tata with Tesco etc.

The government led by Dr. Manmohan Singh, on Friday 14 sep. 2012 permitted FDI in multi-brand retail trading, with the following conditions, :- (a) FDI up to 51% in multi-brand sector. (b) 100% FDI for Single brand retailers such as Apple and Ikea, from previous cap of 51%. Opening up FDI in multi-brand retail means that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the local‘kirana’ stores do.

(2)  Department of Telecom (DoT) FDI limit has been approved to 100% from 74 % in DoT where 49 per cent of investment can be done through automatic route and FDI exceeding 49% will need prior approval of the Foreign Investment Promotion Board (FIPB). It has been done to help the industry get fresh funds to lower financial burden.

 (3)Courier services- FDI has been raised from 74% to 100%.

 (4)Tea plantation & allied sectors (Agricultural Sector) – The foreign direct investment limit has been raised from 49% to 100% in it. FDI exceeding 49% will need prior approval of the FIPB in Tea plantation. 100% FDI is permitted in Floriculture, Horticulture, Development of Seeds, Animal-Husbandry, Pisciculture, Aquaculture, Cultivation of vegetables & mushrooms and services related to agro & allied sectors through automatic route.  FDI is not allowed in any other agricultural activity.

(5)Insurance sector- the FDI limit has been raised from 26% to 49% under the automatic route.

(6)Pension sector- 49%. FDI has been permitted in it.

(7) Railways:- Besides, proposing 100 per cent FDI through automatic route in the cash-starved railway sector, the Department of Industrial Policy and Promotion (DIPP) has also proposed to de-license and de-reserve few areas of the sector. However, FDI will not be allowed in train-operations and safety. Foreign investment would also be allowed in sub-urban corridor, high speed train systems and dedicated freight line projects implemented in PPP mode.  Definition of ‘infrastructure’ has been widened by including railway line and railway sidings.

(8) Manufacturing sector- (i) Defence- FDI is fixed at 26% with prior approval of the FIPB, but govt has indicated that the Cabinet Committee on security has the discretion to approve FDI exceeding 26% (up to 49%) in cases which are likely to result in access to modern and “state of the art” technology, though no criteria to determine the term “state of the art” has been specified. (ii) Alcohal- 100% FDI through automatic route. (iii) Coffee, rubber processing & warehousing-100% in automatic route. (iv)Hazardous chemical-100% in automatic route. (v) Industrial Explosives-100% in automatic route.(vi) pharmaceuticals- 100% FDI is allowed in pharma and medicines through automatic route.On 27 Nov. 2013, the commerce and industry ministry and DIPP suggested lowering of the FDI cap to 49% keeping in mind the take-overs of domestic drug-making companies by multinational giants and consequently the price-hike in medicines. Despite the suggestion 100% FDI is permitted in the field. (vii) Power Exchange –100% FDI is allowed in Power  generation, transmission, distribution, power trading through Automatic route. FDI is not permitted for generation, transmission & distribution of electricity produced in atomic power plant / atomic energy, since private investment in this activity is prohibited and it is reserved for public sector. (viii)- Automobile Sector- the govt allows 100% FDI under the automatic route. It is a fully de-licensed   industry and free imports of automotive components are allowed.

(9)- Civil Aviation Sector –FDI has been permitted up to 49%, with prior Govt of India approval.

(10) Asset Reconstruction- The government raised the cap on FDI in asset reconstruction companies (ARC) to 74% from 49%, another measure to attract capital inflows so as to support the sagging rupee. Foreign direct investment exceeding 49% will need prior approval of the FIPB

(11)Banking (private) sector–  74% FDI in automatic route.

(12) Real estate sector- The real estate is one of the fastest growing sectors of Indian economy and contributes about 6.3% to the GDP. Indian real estate sector is the fourth largest sector in terms of FDI in the country. During April 2012-January 2013, the sector accounted for 8.8 per cent of total FDI inflows into India.

(13) Credit Information Services– The FDI limit has been raised from 49% to 74% under the automatic route, which will not only pave way for more foreign capital to such companies present in India but will also help foreign credit information companies set up shops in the country.

(14) Industry- (i) Mining (exploration & mining of precious stones)-100% FDI in automatic route. (ii) Coal lignite mining-100% in automatic route.

(15) Print Media-. The FDI limit in Print Media is raised to 49 per cent from 26 per cent.

Fourth Section:- deals with the effects of these changes on promoting inclusive growth in Indian economy. The XI plan aimed at achieving a new vision of growth-“Towards Faster and More Inclusive Growth”. At present Twelfth Five Year Plan (2012-17) is going on in Indian economy. It is aimed at one step further, ie, Faster, Sustainable & More Inclusive Growth.”

Sustainable rate of growth is that rate of growth which is capable of being   continued over a long period of time.  For making growth sustainable in India, we have to make growth inclusive by tackling the problems of poverty, inequality and unemployment. Inclusive growth includes each and every one under its umbrella, irrespective of caste, creed, religion in the economy. Sustainability of development must be assessed in terms of economic, social and employment benefits.

Relaxed FDI and Inclusive growth;-

 Retail trade:- India has opened the flood gates for foreign investors in retail sector. It covers 10% of all FDI projects. A simple glance at the employment level in retail exhibits vitality of this business.  Organized trade employs roughly 5 lakh people, whereas the unorganized retail trade employs nearly 3.95 crores.  Expansion of employment in the retail trade is due to-(i) economic expansion (ii) the ‘jobless growth’ in Indian economy. Retail outlets employ about 8% of the workforce in the country.According to the government, 10 million new jobs will be created through FDI because of job opportunities in areas like marketing, agro-processing, packaging, transportation, refrigeration etc.

  •  The post of middlemen in India will be removed. Thus, farmers will get a good price for their crops and their exploitation will stop (which is going on for the last 150 years).
  • Foreign companies will invest around $100 million in India. Therefore, infrastructure facilities, refrigeration technology, transportation, etc. will be renovated. That will reduce the inflationary pressure.
  • According to the Indian Government’s conditions, foreign companies have to source a minimum of 30% of their goods from Indian micro and small industries. This will encourage domestic manufacturing by creating employment and upgrading the technology.
  • Foreign companies will also create a supply-chain in the Indian market. So, the food, which is perished due to bad infrastructure facilities, will not be wasted.
  • FDI in retail will benefit people in a big way, as they will get foreign items at cheaper prices. There will be no place for brokers in the market and quality can win over quantity.
  •  Foreign retailers planning to enter the multi-brand segment would have to invest minimum of USD 100 million with 50 per cent of it in rural areas.
  • Under the norms, 50 per cent of total investment will have to be invested in ‘backend infrastructure’ within three years of the induction of FDI.
  • Consumers would certainly gain from enhanced competition, better quality, assured  weights  and cash memos.
  • The government revenues will rise on account of larger business as well as recorded sales.

Infrastructure contributes 4% in FDI projects and 9% of the total jobs are created in India in this sector.

Technology sector of Indiahas grown rapidly in recent times. Around 10 million people are directly or indirectly employed in this sector at present. The major technology hubs are in Bangalore, Hyderabad, Pune, Chennai, Mumbai and Kolkata which cater to IT-ITES and IT-BPO. Technology exports have increased from 4% to 25% over the last decade.  The top five technology providers of India are Tata Consultancy Services, Infosys, Cognizant, Wipro and HCL Technologies.

The financial service sector of India is in fifth place where FDI is concerned. India’s financial service industry has grown to 21% in 2012-13 and the value of projects has been increased by 75%.

 Telecom:- We are endowed with fast and cheap communication facility through Telecom. The telecommunication sector is growing at a very fast pace in India being the second highest FDI attracting sector. It includes radio paging, cellular mobile, basic telephone services. As per the DIPP the telecom sector has attracted FDI inflows of Rs 58,782 crore from April 2000 till May 2013, which comprises 8.53% of the total FDI inflows. The share of private sector in total telecom was 84.60% in 2010, as against a mere 5% in 1999, according to Department of Telecom.

Courier Services- Now we are free from postal delays and postal insecurity. Enhancement of employment is there. Courier services include carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898.

Railways:-100 per cent FDI permitted in the railway sector through automatic route, is coming in a limited number of projects, like-elevated rail corridor, high speed rail networks, mass rapid transport systems, and dedicated freight line projects implemented in PPP mode. It will provide faster and cheaper transport services as well as general welfare for common masses. Simultaneously, foreign investment up to 74% in railway construction and maintenance projects will be helpful in employment- creation. Between 2000 and 2012, total FDI into the railways was Rs 1,354.65 crore according to the DIPP.

 Aviation services- FDI up to 49%, with prior GoI approval will prove a boon for the cash-starved air line services. Aviation services would save time as well as energy of the public aspiring to travel by air, vis-a-vis employment- enhancement will also take place in economy. Govt. hopes that the general aviation business would emerge as an important medium of regional connectivity and economic development,

The real estate sector in India is witnessing rapid growth in the residential, commercial and industrial segments. The sector is progressing due to several factors like- rapid urbanisation, a growing trend towards nuclear families, positive demographics, rural–urban migration, ever-developing infrastructure, higher income levels and housing demand. It is getting a good amount of FDI and is the second largest employment generation sector after agriculture. Real estate contributes about 6.3 per cent to India’s gross domestic product (GDP). The FDI in the sector was US$ 4 billion in 2012 as per DIPP.

The automobile industry is one of India’s major rapidly growing sectors, amounting for about 22% of the manufacturing sector’s GDP and contributing about 7% to the overall GDP of India in August 2013. The Indian auto industry is the sixth largest vehicle manufacturing in the world with an annual production of 17.5 million vehicles, of which 2.3 million are exported. 16% of all jobs are created within FDI deals in this sector. According to DIPP the auto sector accounts for 4% of total foreign direct investment (FDI) inflow into India. As per the DIPP the total FDI into the sector for the period April 2000 to May 2012 stood at USD 6,853 million.

In spite of the uncertain global economic climate, foreign investors anticipate India to be an attractive investment option. The top five sectors, prone to attract FDI for India are- infrastructure, Multi-brand retail, automotive, technology, financial services. Top 10 Sectors attracting highest FDI inflows during April 2000 December 2012 as per DIPP were: Services Sector (19 per cent), Construction development: Townships, housing, built-up infrastructure (12 per cent), Telecommunications (7 per cent), Computer Software & Hardware (6 per cent), Drugs & Pharmaceuticals (5 per cent),Chemicals (other than Fertilizers) (5 per cent), Power (4 per cent), Automobile Industry (4 per cent), Metallurgical Industries (4 per cent), Hotel & Tourism (3 per cent).

V Section:-  Suggestions and Conclusion

Employment generation and Poverty alleviation are essential conditions of inclusive growth. Let us think about probability of employment generation with the help of FDI in various sectors:-

Relaxed FDI in retail sector will create 10 million new jobs, while 40 million people are already in the field. 

As according to the Indian government’s condition, the retailers (both single and multi-brand) will have to source at least 30% of their goods from small and medium sized Indian suppliers, but what about the other 70%? Walmart and all these big giants import their majority goods from the cheapest source. Walmart is importing goods from China. If Walmart dumps goods from China, we can’t stop it for doing so. It will have negative repercussions on employment generation.

  • Our government can build storages for refrigeration of food. It is not right to open our economy’s gates for foreign giants just because of this reason. If government is not capable of building a supply chain and infrastructure, we can open this field for Indian entrepreneurs.
  • Wal-Mart will source its raw materials from abroad, and procure goods like vegetables and fruits directly from farmers at pre-determined prices & quantities. Once a monopoly situation is created, this may then turn into buying low and selling high. As Nick Robbins wrote in the context of East India Company, “By controlling both ends of the chain, the company could buy cheap and sell dear”.
  • The new type on mediators like: Quality controllers, certification agency, standardizers  etc. have entered the market of US. It may happen in India also.
  • Acceleration of growth propelled by service sector will not have multiplier effect on employment generation and production function, therefore, dream of inclusive growth cannot come true.
  • Big players can knock-out the competition as they can afford to lower prices in initial stages, become monopoly and then raise prices later. Small retailers cannot stand in competition with Giant retailers and Supermarkets like- Walmart Carrefour, etc. so may suffer large loss.
  • On the other hand, countries like China, Indonesia, and Thailand already have 100% FDI in retail. These countries have experienced tremendous growth in the agro- processing industry, refrigeration technology and infrastructure. The Govt of India should enact and implement laws to safeguard small retailers and common public. Pro. Gunnar Myrdal coined India as a “Soft State”, i.e. India is a state where the laws and rules made by the Govt. are not implemented properly.
  •  Only production technique can increase GDP, not the selling technique.
  • It is essential to look into the pros & cons of it from purely economic point of view. The acceptability of FDI in retail in India has been mostly political.

Infrastructure- Availability of good quality physical and social infrastructure is one of the key determinants of economic growth. The government of India has recognized the imperative need for the infrastructure sector and has taken several initiatives like sector specific policies, providing incentives and tax holidays to attract private investments. 100% FDI in infrastructure sector has been permitted.

Manufacturing sector contributes about 27.6% in the country’s GDP and employs about 17% work force. •Deloitte’s global index, 2013, for 38 nations, has ranked India at fourth most competitive manufacturing nation, behind China, the US and Germany. Labour intensive technology as well as planning to increase the manufacturing sector is needed. It can create more employment opportunities in economy. FDI will be helpful in increasing production and thereby control inflation.

Expected major role of private investment gives the element of uncertainty, unpredictability. The same thing applies to FDI.

Conclusion:- At last, we can say that private investment, both Indian and FDI in various sectors, is essential to multiply the Govt’s efforts to elevate millions out of poverty and promote inclusive growth.FDI can contribute to the GDP, can control inflation through productive investment and can add to Foreign Exchange Reserves of the country by bringing foreign currency in the form of capital in order to save the sagging Indian rupee. But FDI cannot promote inclusive growth. FDI in selected sectors, like-infrastructure (railways, ports, airports, roads, high-ways, electricity, telecommunications, petroleum and natural gas, and a regulator for the coal sector), manufacturing sector is the need of hour. In order to bring inclusive growth, FDI be used selectively. Aam aadmi be not forgotten in the name of Reforms.Proper type of Economic Model be decided so as to include the excluded ones in development process and to develop the economy sustainably with social justice and eradication of poverty. Ultimately, the impact of FDI on inclusive growth will depend upon political & institutional factors, policy of the political party in power and the degree of control and regulations exercised over FDI.

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