Tackle regional disparity in FDI

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Tackle regional disparity in FDI

Though FDI inflow has risen consistently in the last three years, Indian policymakers must pay attention to the regional disparities in terms of FDI and try and address key challenges

There has been a staggering growth in foreign direct investment (FDI) under the Narendra Modi Government over the last three years, from $45.15 billion in 2014-15 to $60.08 billion in 2016-17 (see graph 1), an all-time high, due to the sustained easing of more than 80 FDI rules spread across 21 sectors to accelerate economic growth and enhance employment. This sustained growth in FDI is the result of Government’s efforts driven by reforms in FDI norms, tax payments, access to credit, reduction of border compliance time by improving port infrastructure, resolving insolvency and protection of minority investors that has also catapulted India by 30 places to rank at 100th position globally in ease of doing business. Will the recent announcement by the Modi Government of easing the norms in key sectors like retail, civil aviation, construction and power exchanges before the Davos World Economic Forum in January this year lead to an inclusive growth?

According to Department of Industrial Policy and Promotion (DIPP), the total FDI investments in India during April-December 2017 stood at $35.94 billion. Telecommunications has been the favoured sector attracting the highest FDI inflow of $6.14 billion, followed by computer software and hardware — $5.16 billion and services —$4.62 billion, and construction activities — $2.5 billion. The trend was similar for the year ending 2017 (see graph 2 below) However, sectors like defence industries, ports and coal production failed to attract any FDI during the same period.

Country-wise, during April-December 2017, maximum FDI inflows were received from Mauritius ($13.35 billion), followed by Singapore ($9.21 billion), Netherlands ($2.38 billion), USA ($1.74 billion), and Japan ($1.26 billion).

The future holds an influx of multinational companies investing in different parts of our country. After the recent allowing 100 per cent FDI in single-brand retail trading through the automatic route earlier this year with some relaxation in local sourcing norms, Ikea, a single brand retailer, announced its plans to invest up to Rs4,000 crore ($612 million) in Maharashtra to set up multi-format stores and experience centres. Another single-brand retailer, the US-based footwear company, Skechers, is planning to add 400-500 more exclusive outlets in India over the next five years and also to launch its apparel and accessories collection in India.

On the other hand, multi-brand retail giants are not far behind with Walmart planning to set up 30 new stores in India over the coming three years and US-based e-commerce giant, Amazon, with an investment about one billion dollar in its Indian arm in 2017, took the total investment in its business in India to $2.7 billion. Singapore’s Temasek plans to acquire a 16 per cent stake worth Rs1,000 crore ($156.16 million) in Bengaluru-based private healthcare network Manipal Hospitals which runs a hospital chain of around 5,000 beds. Last year, north-eastern region of India saw an investment in the range of $612-765 million after the Government of India asked the States to focus on strengthening single window clearance system for fast-tracking approval processes and mandating clearance of all proposals requiring approval within 10 weeks after the receipt of application, in order to increase Japanese investments in India.This has led to India and Japan joining hands for infrastructure development in India’s north-eastern States and are also setting up an India-Japan Coordination Forum for Development of the North East to undertake strategic infrastructure projects there.

Although FDI is one of the major drivers of economic growth and India has a vast potential to attract far more foreign investment by further  liberalising  and simplifying the FDI regime, there are some major concerns. Firstly, the majority of FDI inflows are from small nations like Mauritius, Singapore and Netherlands and this raises serious doubts if the inflows constitute actual investments or are being routed through these nations to take advantage of benefits of Double Tax Avoidance Agreement (DTAA) that India has with these countries.

Secondly, over the years, there has been a major regional disparity in FDI inflows. States like Delhi, Haryana, Maharashtra, Karnataka, Tamil Nadu, Gujarat and Andhra Pradesh have together attracted more than 70 per cent of total FDI inflows to India during the last 15 years. However, States with vast natural resources like Jharkhand, Bihar, Madhya Pradesh, Chhattisgarh and Odisha have not been able to attract foreign funds directly for investment in different sectors, due to poor physical, institutional, social and political infrastructure.  The regional disparity of FDI is a worldwide phenomenon and is not limited to India. In China, eastern zone provinces attract higher FDI flows because of its high per capita income and living standards reflected into better socio-economic indicators, better infrastructure facilities in terms of electricity, road and rail network and also higher international orientation in terms of their openness to trade. Similar is the case in Romania, where FDI investments are limited to Bucure?ti - Ilfov regions and Russia where the distribution of FDI is attributed to regional factors. This uneven distribution of FDI inflows leads to rising disparity in regional economic growth and creates a serious social divide and the Government needs to take proper steps to have more inclusive growth.

As a solution, the first step is to create a physical and institutional infrastructure backed by strong governance and safe environment in these under-invested States. Secondly, special incentives should be given to multinational companies to invest in these States, not only for economic benefits but also for the improving the infrastructure like energy, higher education and physical and digital connectivity, making public-private partnership in the development of these States a priority for the Government.

Thirdly, although FDI is welcome and as a nation in an ever-increasing globalised world, we cannot stop free flow of capital, it is all the more necessary to develop and revive domestic private investment by providing incentives and by investing in education, health and environment to reap long-term benefits by not only improving India’s socio-economic condition but also boosting domestic private investment. This is extremely important to protect ourselves from uncertainty and volatility due to the exit of multinational companies like General Motors, Barclays and Royal Bank of Scotland to name a few, from Indian soil.

FDI has become an increasingly important source of finance that can contribute to economic development in the developing countries, particularly in India. In fact, for Indian economy, which has tremendous potential but lacks necessary capital and technology, FDI can have a significantly positive impact. However, the true benefit of FDI would be seen if States run by regional parties work in sync with the Central Government by moving beyond party politics and work for the betterment of these States to attract more FDI. Both State and Central Governments should make concerted efforts to develop those regions which are lagging behind and special attention should be paid by policymakers to reduce the regional disparity of FDI and make growth inclusive in nature.

(The writer is Assistant Professor, Amity University)

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