By: Prapanna Lahiri
Generally speaking Foreign Direct Investment (FDI) refers to capital inflows from abroad that invest in the production capacity of an economy. It is direct investment into production or business in a country by a foreign company either by buying a domestic company or by expanding operations of its existing business. Capital formation is an important determinant of economic growth. When domestic savings and investments are inadequate for a country’s overall development, foreign direct investment (FDI) plays a complementary role in filling the gap.
The establishment of the British East India Company was the historical instance of FDI coming into India. British companies set up units in few sectors like mining that served their own economic and business interest.
Towards the end of Indian Independence movement and after independence, a few Indian political leaders led by Jawaharlal Nehru were attracted to socialism. After several trips to USSR, Nehru was convinced that post independence India should be a socialist republic. But instead of adopting socialism in its pure form Nehru adopted mixed socialism where both the state and the private sectors existed competing with each other. To operate under this socialist ideology the private sectors were issued licences to produce and sell their products in the country. This was referred to as ‘Licence Raj’ system. The government aimed at exercising control over foreign exchange transactions. All dealings in foreign exchange were regulated under the Foreign Exchange Regulation Act (FERA), 1973, the violation of which was considered a criminal offence. Through this Act, the government tried to conserve foreign exchange resources for the country’s economic development. Consequently, the investment process was plagued with many hurdles including unethical bureaucratic practices.
This License Raj system existed for around four decades, till the government under Prime Minister Rajiv Gandhi initiated a liberalisation policy. But the actual progress was made under Prime Minister P.V.Narasimha Rao in 1991, when he appointed Economist Manmohan Singh, then a non-political figure, as finance minister signalling a different approach to economics. Indian economy experienced major policy changes. This new economic reform, popularly known as, Liberalization, Privatisation and Globalisation (LPG model) was aimed at making the Indian economy globally competitive. The liberalisation programme encouraged FDI. Under this deregulated regime, FERA was consolidated and amended to introduce the less stringent Foreign Exchange Management Act (FEMA) 1999, meant to facilitate external trade and payments and improved access to foreign exchange. The reforms envisaged that FDI in sectors, to the extent permitted under automatic route, would not require any prior approval either by the Government or RBI. FDI in activities not covered under the automatic route would require prior Government approval.
However, this reform and liberalisation process was not exactly smooth. Contrary to the grand narrative of ‘opening of flood-gates idea’ of 1991, what actually happened was a gradual process of change in policies on investment in certain sub-sectors of the Indian economy. The leftists true to their stated stance opposed the general economic policy unfurled in 1991. A significant political opposition also came from the Swadeshi Jagaran Manch of the RSS. A political storm was raised around Foreign Direct Investment owing to a lack of understanding about it. The policy of globalisation and privatisation were perceived to strike a heavy blow at the self reliant path of development. The target of ‘fight’ against this globalisation and privatisation were the multinational companies (MNCs). FDI was analysed as a tool of MNCs to acquire vital sectors of the economy.
But over some years, changes in the national political climate had precipitated a marked trend towards greater acceptability of FDI. The far reaching unanimity over FDI came in 1995-1996 when the government began to showcase the progress made as a result of FDI. Statistics had been available for most years and FDI entered the mindset of the governments. The future of India’s growth and output was seen to be connected to FDI and it was deemed necessary for promoting higher growth of output, exports and employment.
Foreign investments came in various sectors of the economy showing a good growth in the standard of living, per capita income and Gross Domestic Product. An UNCTAD survey projected India as the second most important FDI destination (after China) for the trans-national corporations during 2010–2012. Successive Indian governments’ policy regime and a robust business environment ensured persistent flow of FDI into the country. With abundant high-skilled manpower, India provided enormous opportunities for investment making it a liberal, attractive and investor friendly destination. The government in recent years had taken measures aimed at relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, stock exchanges etc. It raised FDI cap in insurance to 49 per cent from 26 percent. Cabinet has cleared a proposal allowing 100 per cent FDI in railway infrastructure, network creation and supply of rolling stock for bullet trains but excluding operations. The Government has amended the FDI policy regarding Construction Development Sector: low cost affordable housing, and development of smart cities. The relaxation achieved the purpose of sustaining the FDI flow, a major source of non-debt financial resource and a critical driver of economic growth. FDI to India doubled to US$ 4.48 billion in January 2015, the highest inflow in last 29 months. The data of Department of Industrial Policy and Promotion (DIPP) shows FDI inflows had grown to US$ 25.52 billion during the April-January 2014-15 up 36 per cent year-on-year from the corresponding period of last fiscal. The top 10 sectors receiving FDI include telecommunication followed by services, automobiles, computer software, computer hardware and pharmaceuticals. Finally, the high voltage “Make in India” campaign is a success with a 56% jump in FDI since its launch in September 2014. All these clearly show the faith that overseas investors have instilled in the country’s economy. Nothing summarises the optimism better than the words of the IMF chief, Christine Lagard (in an interview to Times of India), “India has an opportunity to become one of the world’s most dynamic economies. My message will be: Seize it.”