In the corporate world and the media, it is elation that normally ensues when foreign direct investment (FDI) limits are eased for different sectors of industry as they were recently. It wasn’t always like that. People with longer memories will recall the prickly manner in which many sections of Indian industry (then dubbed the ‘Bombay Club’) would react to the prospect of opening up the Indian market to foreign companies and investment, fearing competition, and demanding a level playing field and protection.
Much has changed since then. Tariffs and tax rates are lower; restrictions on FDI have been gradually reduced; many of those at the vanguard of the Bombay Club have been rendered irrelevant; and, importantly, Indian industry today views foreign investment largely as an opportunity.
So the generally positive reaction to this month’s across-the-board easing of FDI limits for 15 sectors, including defence, mining, retail, broadcasting and civil aviation, wasn’t surprising. But just how critical has FDI been for India’s economic growth? And would the latest moves to raise the caps across sectors open the floodgates for foreign investment?
Last Friday RBI governor Raghuram Rajan said he was concerned that both public and private investments in India had dropped but also said that he hoped more FDI would help in setting things back on track. In fact, according to official data, in the first six months of 2015, India received FDI of $19.4 billion compared to $28.8 billion that it did in the full year of 2014.
The London-based Financial Times estimated an even higher level of FDI in the first half of 2015: in a report published in September, it said the FDI flow to India in the first half of 2015 was $31 billion, which was higher than the $28 billion that China got and the $27 billion that flowed into the US during the same period.
In the past 15 years (more specifically, between April 2000 and June 2015), India has received a total of $258 billion in FDI. The biggest share of this, 17%, has gone into the services sector, which includes banking, outsourcing, infotech and R&D. Infrastructure got about 9%; and telecoms and computer hardware 7% each.
In comparison, a manufacturing sector such as the auto industry pulled in just 5%. The point is that so far, FDI has come mainly in non-manufacturing sectors and that appears to be a 15-year trend. If the ‘Make In India’ programme, which the government has pinned big hopes on, has to become successful, FDI will have to buck that trend and flow into manufacturing sectors such as auto, of course, but also drugs and pharmaceuticals; chemicals; and metallurgical industries.
The other point has to do with how big a deal FDI in India really is. In 2014, the FDI flow into India amounted to 12.3% of its GDP; in the same year, the FDI flow into China was 10.5% of its GDP but the story is not quite the same in absolute terms. That year, total FDI in India was $28.8 billion, while China got $128.5 billion, or more than four times what India received. There’s another way you can look at foreign direct investment. How much of India’s total investment is composed of FDI?
The answer: very little. An economy’s gross fixed capital formation is often taken as proxy for total investment. In India, in 2014-15, gross fixed capital formation was $587 billion, of which FDI amounted to $30.93 billion, or merely 5.27%.
That’s not to say FDI is not important for growth. It is. After the NDA government came to power last year and PM Narendra Modi embarked on a foreign policy weighted heavily in favour of economic development, deals worth billions have been signed with several countries. By 2019, Japan plans to invest $35 billion; China $20 billion; and the UK $13 billion.
Japan’s Softbank has already made several investments; Taiwan’s Foxconn, China’s Xiaomi and several others have big plans to manufacture in India; and US private equity investors have made commitments in India’s start-up economy. But FDI is unlikely to be India’s growth engine.
The real engine will have to come from within. Public investment in infrastructure such as roads, highways and airports has to go up. And demand for goods has to rise so that private investment in building capacities grows.
Sanjoy Narayan is the editor-in-chief of Hindustan Times, he tweets as @sanjoynarayan
The views expressed are personal