ATTRACTING FDI INTO INDIA: WHAT NEEDS TO BE DONE? – BY Dr. BOBBY SRINIVASAN AND Dr. SUDHAKAR BALACHANDRAN

November 17, 2014 | Posted by bobbysrinivasan << back to blog

The Indian foreign reserve stands at $315 billion, an amount equal to 7 to 8 months of imports approximately. When we look at the components of reserves, the main contributor are foreign institutional investors (FIIs), non-resident Indian (NRI deposits), external commercial borrowing of public and private sectors (ECB), net royal payments and to some extent foreign direct investments (FDIs). Our merchandise trade is always in deficit eating away the foreign reserve. Also, the foreign direct investment (FDI), more or less is slow coming. If something happens to global stock market, FIIs will flee, which could reduce our reserves significantly. One of our main strength, of course, is the software sector, which has brought in so much of foreign exchange over time.
Is the existing model of acquiring and building foreign exchange reserves the right one for the future needs of India and to stabilize the value of rupee is the moot question which is addressed here.
Foreign direct investment is a must for India. This is a much neglected area as of now and so lots of efforts are needed. Let us look at our current performance:
1. Nokia, a mobile manufacturing unit near Chennai, was one time one of the largest facilities world-wide was closed sine die after they sunk nearly US $ 300 million of investment. Reason offered for closing is unresolved tax dispute. A disputed amount of 3000 crore which subsequently rose to 21000 crore.
2. In July 2013, South Korean steel manufacturing company Posco decided to scrap the steel plant which was to have been located in Karnataka.
Reasons offered: The 6 million capacity steel plant was scrapped due to market condition and significant delays in acquiring land.
3. Arcelor Mittal and the Vedanta group decided not to set up their manufacturing plants in India.
Reason cited: Red tape and land acquisition delays.
4. In the mutual fund industry, which allows 100% FDI, Fidelity, Merrill Lynch, AIG, Temasek, Standard Chartered Bank all exited the Indian market without offering specific reasons.
It is already well known that India is not necessarily the best destination for FDI because of many constraints and restrictions. Laws relating to land acquisition and labour employment regulations are real challenges to foreign companies locating facilities in India. Finally, we can learn a lot from China, which is the front runner in attracting FDI. It is time our government show greater commitment and sell india as a good place to invest. After all, foreign companies want good rates of return from their investment which will include a premium for country risk.
We need a study to evaluate what the foreign companies expect to gain from locating their business in India and what are the possible constraints. Half the battle will be won if these constraints are immediately removed. Every year nearly 10 million job seekers arrive to the market. FDI, to a great extent, can help in creating jobs for these young men and women.

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