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National Seminar on

India’s Post-1991 Inward FDI Experience:

Looking Beyond the Aggregates

Concept Note

The size of capital flows to developing countries increased manifold since the 'nineties.  Simultaneously their composition also underwent significant changes. Foreign direct investment (FDI) has become the preferred form of external capital for developing countries as it is postulated to be associated with a number of intangibles and is projected as less volatile compared to portfolio investment.  Though India liberalised her foreign investment regime in 1991, in the backdrop of a serious external payment crisis, with a focus on the development of the manufacturing sector, the process of opening up has been pursued by successive governments.  As a result, now FDI can participate in practically the entire manufacturing sector and most of the services, without the need for seeking specific approvals from the government.  Alongside, India dispensed with many performance requirements and preferred to offer a free hand to FDI with the expectation that the benefits would flow automatically.  India’s accession to WTO also furthered this process.

While the expectations from FDI have been articulated clearly, identification of FDI in India has never been free from major ambiguities some of which arose from the very manner in which FDI is defined globally.  The international definition, based solely on 10% voting share, is devoid of the essential characteristics of FDI.  India, even while following the international reporting practices by including reinvested earnings and other capital to what are termed as equity inflows for the purpose of reporting the FDI inflows, does not follow the international criterion of 10% voting share for identifying the equity inflows.  Further, what is considered as FDI for reporting purposes is not treated as such for implementing sectoral policies.  The available aggregates fail to reflect adequately India’s experience in terms of many crucial aspects of FDI namely, type of investor, home country, recipient sectors, mode of entry and location within India.  Each of these can have differing developmental impacts.  For instance, the objectives and abilities of financial investors would be different from those who integrate the host country businesses in their global operations. On the other hand, all tabulations by Indian official and international agencies show Mauritius as the single largest source for India’s FDI.  It is obvious that it can never be the case.  Lists of top inflows are generated without taking into account multiple tranches of inflows into individual Indian companies. Also international data on FDI are accepted unquestioningly not withstanding its many limitations and nuances.  Comparisons with other developing countries, especially China, continue to be made with no attempt ever being made to understand the country-specific aspects of the reported inflows.  In fact, hardly any attention is paid to such possibilities, especially in the policy making circles. 

Successive governments have put FDI at the centre-stage of India’s development priorities for over two decades. However, detailed and systematic assessments of the nature of FDI inflows and likely implications of this form of investment have not been made thus far.  Analysis of critical operational aspects of FDI companies is often based on small sets of easily available companies ignoring the fact that a vast majority of FDI companies are unlisted and are registered as private limited companies.  The important issues of contribution to India’s trade balances, technology transfer, local R&D, entrepreneurship and profitability continue to be addressed on narrow base of companies or are dealt with in a perfunctory manner. The liberal definition of FDI based on a uniform 10% foreign ownership also tended to undermine their representative character.
ISID took up a research programme with the financial support of the ICSSR to address a few important gaps in the understanding of India’s FDI inflows.  The programme was steered by Prof. K.S. Chalapati Rao of ISID and Prof. Biswajit Dhar, of Jawaharlal Nehru University.  Based on a wide variety of data sources, this study attempted to provide a realistic picture of the FDI inflows in its various dimensions and also to offer insights into global FDI flows which are essential to appreciate India’s own experience, at a far more disaggregated level than any of the studies of India’s FDI so far.  The output is organised in the form of 12 chapters.  One set of contributions dealing with the international dimension cover cross-border “greenfield investments”, emerging patterns of FDI flows, M&As, retained earnings and the possible large extent of reverse resource transfers that might be taking place to developed countries, especially after the financial crisis. 

Another set deals with the conceptual issues of FDI and a detailed analysis of the inflows.  A critical view of the concept of FDI and its adoption by India provides a backdrop for the classification of India’s reported FDI inflows.  The analysis of inflows has been done in two parts: in the first, broad aggregates till the middle of 2004, and in the second, the data on large tranches ($5 mn. and above) of individual cases of FDI participation during 2004-05 to 2013-14, the period in which inflows rose substantially.  The large tranches of inflows in the second period, which covered about 87% of the total, have been grouped into four categories: “Realistic FDI (RFDI)” which is expected to possess all the characteristics theoretically associated with FDI, “India-related investments” (IRFI), private equity/venture capital, etc. (PEFI); and, Other Portfolio Foreign Investments (OPFI).    Two key outcomes are that almost half of the inflows during this decade cannot be termed as realistic FDI and within the manufacturing sector more than half of the RFDI could be termed as displacing rather than incremental.  Inflows into the manufacturing sector constituted a relatively low proportion of the total reported inflows and those were also concentrated in a few industries. 

An elaborate attempt was made to classify the investors based on the headquarters of their ultimate parent companies to lift the veil provided by countries like Mauritius, Singapore and Cyprus.  The reclassification suggests that USA accounted for the largest amount of inflows.   A surprising second was the group of India-related investors.  Following reclassification, Mauritius, Singapore and Cyprus which figure among the top investors either lose their place among the top altogether or their shares were reduced drastically.  In the context of significant investments made by foreign private equity investors in India one of the chapters looks at the development of venture capital, a subset of private equity. A detailed analysis of foreign acquisitions in the manufacturing sector follows from the observation that about half of the RFDI into the manufacturing sector was of the acquisition variety.  Two chapters in this set are concerned with critical elements of the changes that have already taken place or are expected, and their implications for the functioning of the sectors concerned, namely (i) multi-brand retail business and (ii) defence.  Both of these have implications for strengthening India’s industrial base.  The discussion on retail trade and defence is expected to provide an indication of the manner in which FDI policy gets formulated in key sectors.  The sequence of events suggests that the case of FDI in MBRT provides a classic example of large global corporations succeeding in influencing public policy of developing countries and putting the regulatory system to stupor with the backing of powerful home governments and exploiting the developing countries’ need for foreign capital. On the other hand, the general arguments in favour of raising the FDI cap for the defence sector simply assume that higher caps are necessary to give the foreign investors control (and comfort) as otherwise they will not risk bringing in advanced technologies. The arguments tend to ignore the role of home governments, the critical factor in defence industry.   Some emerging economies that have focused on the development of their domestic armaments industry have done so with considerable support from state-owned enterprises.  The defence FDI policy should, therefore, be seen only as an enabling measure and its success should not be measured in terms of the quantum of FDI. 

The third set deals with aggregate flows and operational aspects of FDI companies.  To begin with, it was noticed that repatriations of all forms accounted for almost half of the equity inflows during 2009-10 to 2014-15 with disinvestments accounting for a little more than one-fourth. Such high servicing burden drains away surpluses from the country requiring even larger capital inflows in future.  Some key facets of functioning of FDI companies, especially their foreign exchange transactions, research and development efforts, payments for technology and the declared profits have been dwelled on in one of the chapters.  Foreign subsidiaries operating in India for many decades are found to be hiking royalty payments even in low technology consumer goods taking advantage of the relaxed norms. In fact, royalties could actually be substituting dividend payments. There were perceptible differences in the behaviour of large listed and unlisted foreign subsidiaries.  Exports by companies having export obligations raise doubts about the sustainability of exports once the obligations are fulfilled.  Further, service exports forming a major portion of the reported export earnings of some manufacturing companies underline the need for caution while interpreting the export performance of manufacturing companies.

The losses and low margins reported by many foreign subsidiaries, including those in trading, suggest that the financial results may not truly reflect the gains to the parent companies from their operations.  Even when some R&D takes place, it is doubtful to what extent India benefits from it both because the payments for the R&D services are determined by ‘contracts’ between the foreign parent and its subservient Indian subsidiary and because the outcome of the research goes into strengthening of the global parent which ‘licenses’ it back to the affiliates in India.  The tendencies described above were studied in greater detail with regard to healthcare and automobile sectors – which attracted the largest amount of inflows within the manufacturing sector.  Overall, it emerged that the expectation that FDI would support the growth of their host economies would hardly be realised if the tendencies that were observed are allowed to perpetuate.  The observations point to the need for a change in India’s strategy towards FDI.

The Seminar is being organised with the twin objectives of disseminating the findings of the study as well as for getting feedback from scholars, policymakers, commentators and other stakeholders which would help in taking the research forward.  Click here for the proposed programme.


for further details

Dr Reji. K. Joseph
Programme Coordinator
Mobile: +91 84690 99299

Institute for Studies in Industrial Development
A sponsored institution of the Indian Council of Social Science Research (ICSSR)
4 Institutional Area Phase II, Vasant Kunj, New Delhi – 110070 INDIA
Phone: +91 11 2676 4600, Fax: +91 11 2612 2448




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