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A major component
of the economic reform initiated in the 1990s was, and remains, the
liberalisation of regulations relating to the inflow and terms of
operation of foreign direct investment. Successive governments, inspired
by the Chinese experience, have set themselves the target of taking
the annual inflow of such investment to $10 billion. To this end,
ceilings on foreign shareholding have been liberalised and raised
to as much as 100 per cent in many industries, approval has been rendered
automatic across a wide range of industries as a precursor to the
proposed abolition of the suitably renamed Foreign Investment Promotion
Board (FIPB), regulations with regard to dividend repatriation and
payments in the form of royalties and technical fees have been eased,
and the government, especially the one in power currently, has stretched
itself in all manner of ways to prove that that it is foreign-investor
friendly.
These efforts
notwithstanding, the record with respect to foreign investment, is
indeed disappointing relative to expectations. The inflow of foreign
direct investment in 1999-2000 amounted to $2.2 billion (Chart 1),
which is not merely way below the $10 billion target, but in fact
lower than the peak of $3.6 billion it touched in 1997-98. The decline
in FDI inflows in recent years has meant that the ratio of foreign
direct to foreign portfolio investment, which rose from 16 per cent
in 1993-94 to 195 per cent in 1997-98, has since fallen to 71 per
cent in 1999-2000. (Recently, however, the government has chosen to
treat inflows resulting from the sale of ADRs and GDRs by Indian companies
in international markets as direct as opposed to portfolio investment.
This would, for purely definitional reasons, improve the direct to
portfolio ratio in the current financial year.)
Chart 1 >>
Despite the indifferent
level of FDI inflow relative to target, an inter-temporal comparison
improves the picture substantially. FDI inflows, which stood below
$100 million in 1990-91, rose to cross the $1 billion mark by 1994-95
and increased almost three-fold in the subsequent three years. And
though there are signs of a tapering off of such inflows over the
last two financial years, the government's 'big-ticket' privatisation drive may in fact take the figure to levels above the
1997-98 peak. A degree of success in enhancing the quantum of FDI
inflow cannot be denied.
An examination
of the 'sources' of such inflow is of some interest (Chart
1a). To start with, non-resident investors, who were major direct
contributors to the inflow of foreign investment during the first
half of the 1990s, have been less conspicuous subsequently, pointing
to a decline in NRI interest or to the fact that NRI funds are increasingly
being routed through corporate bodies, which do not exploit concessions
offered via the NRI window. However, the fact that inflows
have slowed in the wake of the loss of 'direct; NRI interest
is a factor to be noted.
Chart 1a >>
Secondly, as
is to be expected, the decline in flows through the NRI channel have
substantially increased the share of investment routed through registration
with the Secretariat of Industrial Approval (SIA), the FIPB and the
RBI. Not all of this, it must be noted, is investment in greenfield
projects. In the wake of liberalisation of ceilings on foreign shareholding,
from the 40 per cent level required for national treatment under FERA,
a number of companies already in operation in the country raised the
foreign stake in their paid up capital through issue of new shares
to the foreign investor. Many of those issues have occurred at prices
way below the prevailing market values of the shares concerned, implying
that the foreign stake has increased substantially based on a relatively
small inflow of foreign capital. Unfortunately, the quantum of inflow
under these heads is not separately available.
Further, there
have been a large number of cases of foreign firms acquiring wholly
India ones, epitomised by the purchase of soft-drinks giant Parle
Exports by Coca Cola. Data relating to inflows on account of acquisition
of shares of Indian companies by non-residents under section 29 of
FERA is available from January 1996. As Chart 1 shows, the share of
FDI inflows on this account has been substantial in recent years,
accounting for 23 per cent of the total in 1999-2000.
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