ROLE OF FDI OR FII FOR THE INDIAN ECONOMY.

*Dr. Jyoti Vishwarkarma

* 44/A Bhimeshwar Society,Street No 5,Behind Press olony,
Jamnager Road,RAJKOT 360006, Gujarat,Ph 0281 2475038,Mobile 9824501519
E-Mail girishsharma246@yahoo.co.in Lecturer, Govt College, Surendranagar,Gujarat.

We find that in recent times the FIIs have

started selling their investments from the stock
market and the impact is clearly seen in the
the market instability. The 30 share sensitive
Index of Mumbai Stock Exchange sensex is
down to almost 15% and due to this it affects
the growth path of India. It is very easy for FIIs
to withdraw from the market. But on the other
side if the investment is in FDI then the foreign
companies will not liquidate their investments
very easily and its impact of withdrawal will take
time. Looking to both these impacts we should
welcome FDI where we generate more
employment at all levels and educate the
manpower with more advanced level structure.
FDI and FII are in India since long time then
why should we oppose FDI in retail. Here are
some of the facts to analyse why FDI or FII.
INDIAN ECONOMY ON 8% PLUS GROWTH
PATH-FDI OR FII
Growth of Indian economy is a bit shy of
8% mark. The latter is a key index, which the
foreign investors check before committing large
sums of money for investment. Of its own, the
Indian economy will find it difficult to reach this
target, except for an occasional burst of activity;
like the one in 2003. To sustain it, outside help
is needed and domestic house is to be placed
under strict discipline. Democracy is a great
buzzword, if it translates into order and political
stability. Labor unrest, political opportunism and
corporate irregularities are a few issues, which
tarnish democracy and discourage outside
investors. A politically dictatorial regime in China
has avoided all the above and has attracted
foreign investment. India is learning the Chinese
model, though painfully slowly, hence it is finding
it hard to attract foreign investment. Without the
latter it is difficult to match the Chinese
economic miracle.
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WHAT CAN INDIA DO ON ITS OWN?

From 1951 (launch of First Five Year Plan)
till 1991, the growth rate had been about 3.5%.
The population grew at about 2.5%. With dismal
growth and rapidly expanding population, poverty
multiplied and unrest grew louder. Most plans fell
short on their targets either due to missing
investments or monies wasted on money gobbling
heavy industry. Government-to-government loans
from US, UK, Soviet Union and other donor
countries managed to bridge some of the gaps.
Other donor institutions like the World Bank and
Overseas Development Agencies were weary of
India's development model hence they were
stingy in providing assistance. Economic
development model adopted by India never
worked. Plan targets, although modest were never
achieved. The country made dismal progress and
nobody knew, how to do a better job.
There are two events, which are worth
noting, in the midst of this Indian failure. First,
the US-China rapprochement and large-scale
influx of capital from 1980 onwards placed China
on a higher growth path. Indians watched in
dismay as year after year huge sums of money,
reached China and none came their way. Second,
in 1991 India ran out of money and had to
mortgage its gold to borrow money to import the
basics to keep even the dismal economy going.
The above two ended the internal lackluster
debate on how to manage the Indian economy.
The key question now arose as to who should
be entrusted the task of managing the economy
and how much political weight is placed behind
the new economic managers. Noted economist
and current Prime Minister Manmohan Singh's
services were requisitioned in 1992. As a
Finance Minister, he further requisitioned the
services of Montek Singh (another economist)
and others. Together they set out to put India's
finances in order.

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PERIOD 1991 TO 1997

It was an adjustment period for the Indian
economy. Badly needed fresh thought was
brought into the management of the economy.
Other equally able economists succeeded to turn
Indian finances around and opened up the
bottlenecks to growth. Concurrently China kept
reaping the harvest of good governance with
huge investment cash inflow. Its GDP grew at
8% a year. It was export-led boom for them.
The latter is good but is not an ideal situation.
The exports were priced low in order to pay for
the monies received and allow huge profits for
the American businesses. The Chinese were
willing to go thru this sacrifice, as long as the
population stayed employed and more money
kept coming their way. Even today, Chinese
products are priced low with enterprise
profitability, as least of their concern. In other
words, China is simply a manufacturing bureau,
where foreign investment is made to take
advantage of artificially pegged low labor costs.
India does not subscribe to the Chinese
model. Businesses in India have to operate to
turn out a profit, pay taxes and employ people.
Since Indian taxation is high, this together with
restrictive trade practices and political turmoil
from time to time made India as an unattractive
place for foreign investment. But there was one
silver lining. The US and the West, post-1998,
needed English speaking, highly skilled IT and
BPO consultants in large numbers. As India had
this necessary resource this sector was ripe for
investment. China was not in the running as it
lacked the English speaking populace and the
West did not wish to put all its eggs into one
basket. Small investment in India placed this
sector on a rapid growth. The other sectors of
economy felt the benefits of this sudden boom
and prospered.
PERIOD 1998 TO 2004
It is the period of greatest improvement in
the Indian economy and its perception abroad.
The economy grew at 6.5% with an occasional
burst of 8% in 2003. The foreign money
managers started to look at India favorably.
Political instability diminished a bit. Constrictions
to the growth were slowly removed or reduced.
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That allowed the Foreign Direct Investment (FDI)

to increase. A total of about $3.5 billion in FDI
had reached India in 2004. It compare
unfavorably with China, which received $50
billion, but it was three times higher than what
India received in 1998.
The economy today is performing better
than it has ever performed in last 50 years. Still
it is not performing at its full potential. Additional
outside investment is needed now to reach its
stated 8% growth potential.
WHAT DOES INDIA NEED - FDI OR FII
FDI usually is associated with export
growth. It comes only when all the criteria to set
up an export industry are met. That includes,
reduced taxes, favorable labor law, freedom to
move money in and out of country, government
assistance to acquire land, full grown
infrastructure, reduced bureaucratic involvement
etc. IT, BPO, Auto Parts, Pharmaceuticals,
unexplored service sectors including accounting;
drug testing, medical care etc are key sectors
for foreign investment. Manufacturing is a brick
and mortar investment. It is permanent and stays
in the country for a very long time. Huge
investments are needed to set up this industry.
It provides employment potential to semi-skilled
and skilled labor. On the other hand the service
sector requires fewer but highly skilled workers.
Both are needed in India. Conventional wisdom
is that China will have an upper hand in
manufacturing for a long time. If India plays its
cards right, India may be the hub for the service
sector. Still high-end manufacturing in auto parts
and pharmaceuticals should be India's target.
The FII (Foreign Institutional Investment)
is monies, which chase the stocks in the market
place. It is not exactly brick and mortar money,
but in the long run it may translate into brick
and mortar. Sudden influx of this drives the stock
market up as too much money chases too little
stock. In last four months an influx of about $1.5
billion has driven the Indian stock market 20%
higher.
Where FDI is a bit of a permanent nature,
the FII flies away at the shortest political or
economical disturbance. The late nineties
economic disaster of Asian Tigers is a key

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example of the latter. Once this money leaves,

it leaves ruined economy and ruined lives behind.
Hence FII is to be welcomed with strict political
and economical discipline.
China receives mainly the FDI. They do not
have instruments to receive the FII i.e. laws,
institutions and political and judicial framework.
On the contrary, India should welcome both and
work hard to retain both.
INFRASTRUCTURE RENEWAL
To keep the Indian economy growing the
infrastructure sector like power, transport, mining
& metallurgy, textiles, housing, retail, social
welfare, medical etc has to be upgraded. After
the Enron fiasco, it is difficult to persuade
anybody in the west to take interest in any of
these sectors. Hence India is left to its own
devices to raise money and build this sector.
Borrowing abroad supplemented with Indian
resources is the only way open to India. This
upgrade is needed prior to or in step with the
industrial and service exports sector growth. It
has to be placed on a higher priority. Only recently
a suggestion to use a small portion of India's
foreign reserves met with howl of protests. The
protestors in the Indian Parliament did not
understand the proposal. Hence the government
is stuck to steamroll its proposal through the
legislative process or succumb to political
pressure and do nothing. The latter is not
acceptable.
If India finds its own $4 billion a year for
infrastructure then foreign investors will kick in
another similar portion. The resulting money will
very quickly rebuild the now cumbersome
infrastructure.
INDIAN AGRICULTURAL ECONOMY
India has burgeoning population and a huge
poverty. To reduce poverty, population growth
has to be controlled. The agricultural output at
the moment barely feeds the population. The
caloric intake is low as compared to the West.
Production of meat and milk has to increase
significantly to increase the caloric intake and
improve the health of the populace. The
agricultural production, which has slowed down
a bit in last 3 years, has to maintain a pace well
above the population growth. To maintain 4%
growth in agriculture sector, capital input in form
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of fertilizer, power, improved seeds, storage of

floodwater and transferring surplus water to
deficient areas has to be increased. Monsoon
vagaries will have to be overcome with water
resources management.
Agricultural capital input takes about ten
years to mature and give results, hence this
investment is to be made today to reap benefits
in the future. This capital input has to be
internally generated. World Bank and other longterm lending institutions could provide some
help, but most monies have to come from within.
About $10 billion a year is to be invested in this
enterprise. This has priority over all other
enterprises.
HENCE HOW MUCH FDI AND FII INDIA
NEEDS
Economists believe that additional $20
billion a year for next ten years will drive up GDP
growth to additional 2 -3% from the current level
of 6.5 -8%. If these monies arrive in the form of
FDI, it is good for the country. If it arrives in the
form of FII, it is still good, but it has to be
controlled. Internal resources and withdrawal
from foreign reserves, trade loans, long term
financing from World Bank etc will add additional
luster to the investment plans.
All the above will happen, if the planned
structural changes to the Indian economy are
concurrently made and country's bureaucratic
structure is made investor friendly. Other
legislative changes needed to ensure the safety
of investor's money are made concurrently. The
recent changes in India's patent rules and
regulations are steps in the right direction.
All in all India has to become investor
friendly. It is need of the hour. Left leaning politics
will not help. Opportunism in politics, which
endangers the welfare of the people, is to be
thoroughly discouraged.
OPENING OF FDI IN RETAIL
The opening up of the Indian retail sector
to the world players by allowing 100% foreign
direct investment (FDI) in single-brand retail
and 51% in multi-brand is a sign of more forced
reforms to come.
The issue of FDI in retail is a long pending
one and the government did not act on it earlier

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due to political compulsions when it was

supported by the Left and due to more urgent
issues stemming from the credit crisis in 2008
and scams in 2011. On a long-term basis, the
opening up of FDI in retail is positive for both
inflation and the rupee exchange rate as global
retailers look to set up shop in India.
The government was forced to take the
decision of opening up the retail sector due to
one,the rupee depreciating 15% against the US
dollar and secondly, inflation staying at over 9%
levels for six consecutive months. Even
opposition from a key ally in West Bengal did
not deter the government when it announced the
higher FDI in retail. Money will not rush into India
on the back of the announcement, but it is a
positive reform measure under forced
circumstances.
But now the government has suddenly
catapulted back from its eartier stance of
allowing FDI in retail under the pressure of
opposition in and outside the Parliament. The
decision has now been postponed till such time
as to garner full support from all the stake
holders. Prime Minister hopes to present the bill
in Parliament again sometime in March after the
Assembly elections in 5 states are completed.
FDI IN AVIATION SECTOR
The government is also considering
allowing FDI in the airlines sector, which faces
headwinds due to structural issues in aviation
in India and the near-bankruptcy of two large
carriers - Air India and Kingfisher Airlines.
Again, FDI in the airlines sector has been
an issue for many years with the government
even blocking a proposed joint venture between
the Tata group and Singapore Airlines.
The FDI proposal for the airline industry is
again a forced policy measure as a healthy
airline industry is crucial for the infrastructure of
the country and if three of the largest airlines
(Jet, Air India and Kingfisher) are in the red, it
does not bode well for aviation in India.
In related currency developments, the
government increased the foreign institutional
investor (FII) limit for government bonds and for
corporate bonds by $5 billion each, taking up
total FII limits to $15 billion for government bonds
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and $20 billion for corporate bonds. The previous

limits were almost fully utilised and there was
more demand from FIIs for investment in Indian
debt, despite a weakening currency. The limits
will get filled up gradually but all the same this
is positive for the rupee. The government needs
to address two sectors that are in dire straits oil and power. The government is not allowing
the pass-through of higher costs to the end user
and this is creating deep holes in its pockets as
it has to ultimately bear the burden of the
subsidies. Indian oil marketing companies have
lost almost `65,000 crore in the first half of this
fiscal for selling fuel below cost.
The power sector is in deep trouble with
state electricity boards (SEBs) suffering losses,
as they are not allowed to sell electricity at cost
to the end user. The SEB losses are estimated
at around Rs100,000 crore as of October 2011.
Power producers are reluctant to sell power to
SEBs as they do not get full and timely payment.
As a result, even if power is available in plenty,
there is an artificial shortage of power as SEBs
are not able to source power at cheaper rates.
The end result of subsidies is the
government's fiscal deficit going higher than
projection leading to rise in borrowing costs. The
government's fiscal deficit for 2011-12 is
expected to exceed budget estimates of 4.6%
by 1%. Bond yields have risen by 60 basis points
on the back of higher-than-expected fiscal deficit.
Policy reforms in fuel and power will be
crucial. Until then, any reform is welcome.
They cite 10-year data, which do indicate
that the growth momentum picks up in last six
months of a financial year. And this year, in
particular, has been seeing resilience in the
services sector and sustained private domestic
consumption. All this will add to the numbers
and, therefore, GDP growth will be above 7 per
cent. So goes their argument.
Economic advisers in the government
proffer three arguments. First, that
manufacturing will pick up in the next few months.
Second, that there may be discrepancies in
industrial production data that warrant correction
later in the year. And, third, that agriculture, small
and medium enterprises and services will come
to the rescue.

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Conceding that 6.9 per cent growth in the

second quarter was "less than expected," he
still expects over 7.5 per cent growth in the full
year. None of his fellow economists believes
him.
In agreement is only finance minister
Pranab Mukherjee who too is on record that
growth will be over 7.5 per cent, his hope derived
from the 7.3 per cent growth in the first half.
The minister's chief economic adviser,
Kaushik Basu, is reconciled to a figure of
"around 7.5 per cent". But he adds a rider. He
points to three factors that may upset all
calculations - the global slowdown, the fight
against inflation at home and, "most
importantly," the "slow decision making
process."
The Planning Commission trots out its own
set of figures, ranging from 7 to 7.5 per cent.
Deputy chairman of the Planning Commission
Montek Singh Ahluwalia subscribes to this view.

"We may end up with the same GDP

numbers in third quarter and perhaps in the fourth
quarter it will improve. The growth rate is going
to be between 7 and 7.5 per cent this fiscal,"
says Ahluwalia.
But then his principal adviser, Pronob Sen,
the guy behind the 12th plan rollout, is not sure
owhat the final growth could be. He won't put a
number to the year's growth, pointing to
erroneous industry data. He has no problems
with export data though, which have been
vouched for by IMF.
Sen also says the performance of small
industries has been good, as reflected in bank
credit data but not in the growth story. Small
industries (which account for 48 per cent of
industrial output) bailed out India's growth in
2008. This year too they will do an encore,
argues Sen.

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