Why Record FDI Inflow is Not a Cause for Celebration?

Synopsis: The record level of FDI inflows in India for the year 2020-21 does not match the development priorities of the government.

Background

• In a recent press release, the Ministry of Commerce and Industry announced that India has attracted the highest ever total FDI inflow (U.S.$81.72 billion) during the financial year 2020-21.
• This is 10 percent higher than the last financial year 2019-20.
• Also, given that there was a decline in global FDI inflows in 2020 by 42% compared to 2019, and inflows to developing countries had fallen by 12%, this is a significant development.
• Effective implementation of FDI policy reforms, investment facilitation, and ease of doing business were credited for the record level of FDI inflows.
• However, an analysis of FDI inflow data reveals that the reality of FDI in the Indian economy does not help India’s development priorities.

Why FDI inflows accounted for the year 2020-21 will not benefit India’s development priorities?

• First, the nature of the bulk of the investments involves just a mere transfer of shares without creating productive assets in the country. This is contrary to the expectation that FDI can contribute to the revival of the economy
• For instance, take the case of Reliance Group companies, the largest recipients of FDI for the year 2020-21. It accounted for 54.1% of the total equity inflows during the three quarters.
• In this case, FDI inflows were meant to facilitate Reliance Industries to withdraw its investments already made in the form of Optionally Convertible Preference Share.
• This, therefore, amounted to the indirect acquisition of shares held by Reliance Industries.

Optionally Convertible preference shares: This class of shares can be converted into equity shares either at the option of the holder or at the option of the company. The convertible portion can be in full or in part

1. Second, according to RBI, though FDI inflows were stronger in 2020-21, their distribution was highly skewed.
   • For instance, the manufacturing sector received just 17.4% of the total inflows during 2020-21.
   • Whereas, the services sector attracted nearly 80% of the total inflows, with information technology-enabled services (ITeS) being the largest component.
   • Further, according to the RBI, non-acquisition-related inflows into the manufacturing sector were the lowest in 2020-21.
2. Third, the bulk of the investments in Reliance Group companies will not facilitate sharing of managerial experience and technical expertise. Because investors’ share is pegged at 9.9%. For instance, Facebook’s shareholding in Jio Platform was pegged at 9.9%.
   • According to the International Monetary Fund and also the RBI, a foreign investor, holding 10% or more of voting shares in a company, can exercise a significant influence on its management.
3. Finally, there are other issues related to FDI inflows in India for the year 2020-21. For example,
   • According to RBI data, there was a 47.2% increase in repatriation/disinvestment in the year 2020-21.
   • Further, RBI reports that there was a high increase in portfolio investment (FII) for the year 2020-21. This was the second-highest level of FIIs’ involvement in India.
   • Surely, sustained sizeable repatriation of the long-term FDI, together with a large increase in speculative capital (FII’s) is not good for a country’s Economic Health.

Source: The Hindu