{"id":35045,"date":"2018-10-31T14:55:18","date_gmt":"2018-10-31T09:25:18","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=35045"},"modified":"2018-10-31T14:55:18","modified_gmt":"2018-10-31T09:25:18","slug":"is-fdi-the-new-engine-of-growth","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/is-fdi-the-new-engine-of-growth\/","title":{"rendered":"Is FDI the new engine of growth?:\u00a0"},"content":{"rendered":"<p><a href=\"http:\/\/www.livemint.com\/Opinion\/NJ5xQMUEkTB4rc8Mr7fpLI\/Is-FDI-the-new-engine-of-growth.html\"><span style=\"font-weight: 400;\">Is FDI the new engine of growth?<\/span><\/a><span style=\"font-weight: 400;\">:\u00a0<\/span><\/p>\n<p><b>Context<\/b><\/p>\n<p><span style=\"font-weight: 400;\">FDI from private equity funds have mainly financed e-commerce firms. These have drove import-led consumption boom.<\/span><\/p>\n<p><b>Discussion paper on Industrial Policy \u2013 2017<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The official discussion paper (DP), Industrial Policy 2017 sets down a list of known constraints, but it ignores serious analyses of poor industrial performance.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Discussing competitiveness, the policy paper makes very little reference to trends in global trade, or inadequate domestic industrial demand, falling capacity utilization or negative credit growth.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Exception: Flagging the boom in foreign direct investment (FDI) inflows, the paper claims it as a badge of success for official policy. India is now ranked amongst top 3 FDI destinations (World Investment Report 2016) and ninth in the FDI Confidence Index in 2016.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The official paper also pins hope on outward FDI to strengthen domestic industrial and services capabilities.<\/span><\/li>\n<\/ul>\n<p><b>What does FDI inflow do for the economy? <\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">FDI (as against foreign portfolio investment, which flows into the secondary capital market) brings in long-term fixed investments, technology and managerial expertise, together with foreign firms\u2019 managerial control.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">FDI in green field investment is for fresh capital formation, and in brown field investment for acquiring existing enterprises with the expectation of improving the firm\u2019s productivity and profits.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Despite rising FDI inflows, domestic capital formation rate, or industrial capacity utilization, have declined.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Drawback: FDI does not come from leading global producers of goods and services, but from shadow banking entities such as private equity (PE) funds. <\/span><\/li>\n<\/ul>\n<p><b>About Private Equity (PE) funds<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">These funds are used to finance retail trade of mostly imported consumer goods to expand their market shares, in order to boost the firm\u2019s market valuations.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Since PE investments are highly leveraged (high debt-equity ratios), rising markets valuations help them reap disproportionate gains when they make their exit. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">PE firms do not commit to fresh capital formation or invest in technology, as expected of FDI.<\/span><\/li>\n<\/ul>\n<p><b>Where is the outflow going? <\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">India is being used as a conduit for routing international capital for tax arbitrage.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Inward and outward FDI flows across emerging market economies are highly correlated, responding to the US policy rate.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Inward and outward FDI flows apparently represent channeling of global capital via India to take advantage of tax concessions.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Hence, such short-term foreign capital movements in and out of the country may contribute little to augment domestic capability.<\/span><\/li>\n<\/ul>\n<p><b>Contribution of FDI in question<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">If the foregoing arguments and evidence are valid, then recent FDI flows have contributed little by augmenting domestic capabilities, output and employment growth.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Inward FDI, increasingly from PE funds, has largely financed e-commerce firms, driving import-led consumption boom.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Outward FDI, instead of enabling domestic enterprises to access external markets and technology, has instead helped international capital to take advantage of India\u2019s tax treaties to optimize tax burden of global firms. <\/span><\/li>\n<\/ul>\n<p><b>Conclusion<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The proposed industrial policy needs to look elsewhere, other than FDI to realize the vision of Make In India.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Is FDI the new engine of growth?:\u00a0 Context FDI from private equity funds have mainly financed e-commerce firms. These have drove import-led consumption boom. Discussion paper on Industrial Policy \u2013 2017 The official discussion paper (DP), Industrial Policy 2017 sets down a list of known constraints, but it ignores serious analyses of poor industrial performance.&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/is-fdi-the-new-engine-of-growth\/\">Continue reading <span class=\"screen-reader-text\">Is FDI the new engine of growth?:\u00a0<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-35045","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704818065},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/35045","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=35045"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/35045\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=35045"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=35045"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=35045"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}