FDI as fait- accompli

Dr Ashwani Mahajan
In the last few months government has been indulging in clearing path for hiking the cap of FDI in several sectors including Telecom, defence and insurance. However this attempt of the government was confronted by not only opposition parties and other groups; even its own ministries were intensely opposing this move. It is notable that Ministry of Home Affairs had vehemently opposed attempt to raise FDI cap in telecom sector to 100 percent and increasing the presence of foreigners in other sectors. Home Ministry’s argument was that if we permit countries like china, Bangladesh, Pakistan, Saudi Arabia and Indonesia, to invest in sensitive sectors as telecom, defence, space, civil aviation etc., we may be creating security risks for the nation. Ministry of Defence had also opposed the move on the similar lines; again raising security concerns and had said that such moves would cause vulnerability of the security of the country and enemy nations may dictate their terms. Home Ministry had written a strong letter to the Department of Industrial Policy and promotion and openly stated in the media that it is opposed to the recommendation of Telecom Commission to allow 49 percent FDI through automatic route. But it is unfortunate that disregarding all well meaning opposition from its own departments, the government decided to raise cap of FDI in 12 important and some very sensitive sectors, perhaps compromising the internal and external security of the nation.
Foreigner’s Stranglehold to Increase in 12 Sectors
It is notable that FDI limit in telecom has been increased to 100 percent. FDI cap in case of state of the art defence equipments also has been raised from present 26 percent to 49 percent. Subject to approval from the parliament, FDI limit in insurance has been raised from present 26 percent to 49 percent. Rising of FDI cap in different sectors is unfortunate, as FDI caps have not been raised to help country progress fast by inviting foreign capital; even the declared objective of the government for said step, is that this move will help in overcoming looming payment crisis and depreciation of rupee. Government claims that as FDI caps are raised, investment climate would improve and foreign investors would be attracted to bring more foreign exchange and disequilibrium in the balance of payment would be taken care of, and depreciating rupee will get a support. Old development rhetoric is not being repeated with force by the official circles, as government itself is not sure about the same. What is being said is that we would be able to somehow overcome crisis of diminishing value of rupee.
Weak Rupee and Vulnerable Economy
Rupee had already touched its historic low at rupees 61.20 per US$, on July 8, 2013. Those who were not taking this depreciation of rupee seriously are seemingly worried now. Finance Minister P Chidambaram was earlier saying that there is nothing to worry, as government is taking steps to engineer recovery and encourage growth. Prime Minister’s economic advisor was saying that there is nothing unique and special for India as other Asian currencies are also weakening vis- a- vis US dollar; therefore there is nothing special for India to worry.
Today, common man, the government, economists are all in a situation of shock. Economy, which was already under duress due to hyper inflation, is now facing an added attack from depreciating rupee, which is causing unprecedented hike in the cost of imported goods, causing inflation to reach at unmanageable situation. Majority of our imports are such that they do not decrease even if rupee depreciates, such as petroleum products, raw materials, gold and silver, machinery etc. On the other hand even exports also do not increase with depreciation of rupee. Under these circumstances our balance of payment position may further worsen if depreciation of rupee continues for some more time. These negative developments on payment fronts may cause our external debt to inflate to unmanageable levels.
Remedy  worse than the Disease
To find remedy to the crisis, we must understand the genesis of the problem. Basic question is that how our nation has fallen into this trap of payment crisis, depreciating rupee and rising external debt. Finance Minister tries to shift the blame on import of gold, coal and crude oil. However, Finance Ministry cannot get away with this explanation and hide its blunders. If we talk of petroleum products, their imports valued $155 billion in 2011-12; and this increased to $169 billion. Thus there was increase by merely $15 billion. If any one item which is a major cause of balance of payment disequilibrium, it is import of gold and silver. Hike in import of gold and silver has not increased in short span of time. In the last couple of years, import of gold and silver has multiplied and reached 60 billion in 2011-12 and little less at 56 billion in 2012-13.
Government was in know of rising imports of gold and silver but chose to be a silent spectator, for reasons best known to them. China in continuing its hostilities against India and is keeping up strategic pressure on India. Trade deficit with China has reached 40 billion dollars. Despite enemy like behaviour, India government instead of restricting or banning imports from China is rather working to promote Chinese interests, by allowing Chinese companies to obtain licences and contacts.
FDI a Cause of Growing CAD
Promotion of foreign investment, being claimed as the policy panacea, is also an important cause of payments crisis. During the five years from April 2008 to March 2013, a total of $158.8 billion FDI was received in the country, whereas $128.2 billion were transferred abroad by foreign companies, under the heads of royalty, dividend, interest, salary, etc. during the same period. Last year, that is, 2012-13, FDI we received amounted to barely $22.4 billion, but the income transferred abroad stood at $32.2 billion.  But in return for this meager net amount of  FDI, vital sectors, companies, markets and resources of the country were handed over to foreigners. During this time we have put on ourselves, the burden of future liability for eternity.  For the last one and a half decade, the country is bearing the brunt of foreign investment and by inviting FDI today, we are compelling our future generations to pay for the same in the longer run.
What we need today is that Government restricts the import of consumer goods, telecom equipments, power plants and other project good (especially from China). An effective ban on import of gold and silver, lock-in-period of three years should be imposed on Foreign Institutional Investors (FIIs) and stern action be taken on the illegal transfer of foreign exchange by MNCs.  The country runs the risk of falling into deep foreign exchange crisis if timely steps are not taken by the Government.
The author is Associate Professor, Department of Economics, P.G.D.A.V. College (University of Delhi)

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