Mumbai: Despite policy changes, there has been “no drastic change in the broad character” of foreign direct investment (FDI) into India during the administration of the current National Democratic Alliance (NDA) and its Congress-run predecessor, according to a new study.

“The reported large inflows during the past three years have been widely attributed to the initiatives taken by the new government,” said the study, released in July 2018 by the New Delhi-based Institute for Studies In Industrial Development (ISID), a policy research organisation. “We have seen... that FDI policy changes, if at all, could have only a limited influence.”

FDI into sectors such as insurance, defence and direct-to-home television services--for which policy was relaxed--was responsible for 19% of FDI into India between October 2014 and March 2017 (the latest data available), a fall of two percentage points from 21% over the previous two years, said the ISID study, which analysed FDI between 2007-08 and 2016-17.

The FDI inflows went to only 37% of companies in the manufacturing sector, 16% contributed to new capacity or was used to rehabilitate troubled companies over the 29 months in question, and the repatriation of FDI, technically called the disinvestment ratio--the process of sending foreign currency to another country--increased by six percentage points over six years to 2017, the ISID study said.

No more than 30% of FDI between October 2014 and March 2017 went to manufacturing, compared to 48% during October 2012 to September 2014.

Attracting FDI was one of the three main goals of the government’s Make-in-India programme, which made specific reference to harnessing FDI, with 25 sectors, almost half of them not in manufacturing, identified for special focus.

As FDI levels reached a record high of $61 billion (Rs 4,12,887 crore), in 2017-18, the study attempted to assess how much of this investment was helping India’s economy, the world’s sixth largest. It used “best approximations”, listing “distortions” in official statistics, delayed and duplicate reporting and “notional inflows” as handicaps in calculations.

FDI into India increased from $36 billion in 2013-14 to $60 billion in 2016-17, an all-time high, according to government data, but as a proportion of gross domestic product (GDP), it has declined, as FactChecker reported in June 2018.

During the first term of the Congress-led United Progressive Alliance (UPA-I, April 2004 to May 2009), FDI as a proportion of GDP increased from 0.9% to 2.7%, reaching a peak of 3.6% in 2008 (the highest ever since 1975). During UPA-II (May 2009 to May 2014), the ratio declined from 2.7% to 1.7% and during the current NDA administration has gone from 1.7% to 2% in 2016.

Of $2.32 billion or 137 assessed investments identified by the study between October 2014 and March 2016, no more than 17% or $385 million contributed to new capacity creation--which includes skill building in companies, hiring and training more workers, helping firms increase production--or rehabilitation of troubled companies, the study found.

FDI policy changed in August 2014

The Bharatiya Janata Party-led NDA government first liberalised FDI policy in August 2014 by raising the cap on foreign investment in defence industries and allowing foreign investment to upgrade railway infrastructure.

An important aspect of India’s FDI flows is the substantial amount of repatriations/disinvestments (funds that foreign firms earn in India through sale of goods and services or shares that can be sent back to their country of origin).

The ratio of disinvestment/repatriation to FDI inflows, which was 30% during 2010-11, increased to nearly 36% in 2016-17. The estimate for 2017-18 (up to January) is nearly 47%.

These figures of rising disinvestments are in addition to outward remittances by way of dividends paid by foreign companies from their Indian units to parent units abroad and payments made by Indian companies for technology and other services.

“The real test of FDI policy is in attracting what we term as realistic FDI (RFDI) and getting the expected benefits from it,” the study said. “Financial investors who differ from RFDI investors invest mainly in projects initiated by domestic entrepreneurs.”

Source: Institute for Studies in Industrial Development Study Calculations *Data as of January 2018

“Realistic FDI represents a packaged transfer of capital, technology, management and other skills, which takes place internally within multinational firms such as Suzuki Motors that has been in India for almost 40 years now,” K.S Chalapati Rao, distinguished fellow, ISID, and co-author of the study, told IndiaSpend.

Between October 2014 and March 2016, the share of RFDI was a little above 50%. Thus, there was no change in the broad character of inflows compared to the earlier years (2004-05 to 2013-14) to indicate a shift in the nature of inflows received till March 2016, the report said.

Is Make In India attracting FDI?

The Make-In-India programme aimed to develop India into a manufacturing hub, and one of the ways to do this was through FDI.

Of 1,188 companies analysed for the study, only 37% or 442 were in the manufacturing sector and 746 were in other activities. Of the $51.7 billion FDI that these companies attracted during October 2014-March 2016, the manufacturing sector received 26%, while 74% went to non-manufacturing, including services.

Distribution Of FDI Inflows In Manufacturing, October 2014 To March 2016
Industry Companies Realistic Foreign Direct Investment (RFDI, In $ million) Non-Realistic Foreign Direct Investment (In $ million) Total (In $ million) Share of RFDI (In %)
· Transport Equipment (incl. parts, etc.) (7.9%) 75 3,890.40 182 4,072.40 95.5
· Chemicals (4.5%) 73 1,693.40 623.9 2,317.30 73.1
· Machinery & Equipment (2.7%) 70 1,109.30 269.8 1,379.10 80.4
· Food Products & Beverages (2.2%) 46 897.7 247.3 1,145.00 78.4
· Coke & Refined Petroleum Products (1.8%) 3 929.5 6.1 935.6 99.3
· Metals & Metal Products (1.4%) 42 504.7 196.8 701.5 71.9
· Electrical Machinery & Apparatus (1.4%) 30 503.2 196.6 699.8 71.9
· Rubber & Plastic Products (1.3%) 20 477.9 193.3 671.3 71.2
· Non-metallic Mineral Products (0.5%) 19 195.5 88.7 284.2 68.8
· Paper & Paper Products (0.4%) 7 185.6 20.8 206.5 89.9
· Radio, Television & Communication 8 100.9 78.9 179.8 56.1
· Medical, precision & optical instruments,etc. (0.3%) 10 117.3 26.1 143.5 81.7
· Office, Accounting & Computing machinery (0.2%) 5 112.6 7.9 120.6 93.4
Total 442 11,070.00 2,492.30 13,562.40 81.6

Source: Institute for Studies in Industrial Development Study Calculations
Note: Data for only 1,188 companies analysed by the study.

The transport-equipment sector alone accounted for 30% of FDI in the manufacturing sector. Indian subsidiaries of multinational companies in this sector are known to repatriate money to parent companies as royalties. For example, Maruti Suzuki India (MSIL) paid out $3.6 billion as royalty/technical know-how over eight years to 2017, while Suzuki invested only $870 million till March 2016, the study said.

On a year-on-year basis, the share of manufacturing improved during 2016-17 to 33% from 25% in 2015-16. However, as we said, 30% of FDI between October 2014 to March 2017 went to manufacturing, compared to 48% during October 2012 to September 2014.

Sectoral Distribution Of FDI Inflows
Sector Oct 2012 – Sept 2014 Oct 2014 – March 17 2015-16 2016-17
Services 44% 64% 69% 62%
Manufacturing 48% 30% 25% 33%
Energy (incl. Petroleum & Natural Gas) 6% 4% 4% 5%
Primary 2% 1% 1% 0.30%
All Sectors 100% 100% 100% 100%
Inflows ($ billion) 48.4 99.7 40 43.5

Source: Institute for Studies in Industrial Development Study Calculations

Reporting errors in FDI

Delayed reporting, notional inflows, inappropriate industrial classification and “round-tripping” were among the issues identified by the study as reporting errors. Round tripping is the process by which money flows to a foreign country--such as the Bahamas--that serves as a foreign-exchange haven and comes back as FDI.

The tightening of disclosure laws, such as mandatory online filing, according to the 2016-17 annual report of the Reserve Bank of India (RBI), revealed duplicate and incorrect entries, higher notional inflows and “inappropriate” industrial classification.

The impact of these measures was felt in 2017-18: Net FDI reported in August 2017 was $37.3 billion, which declined to $30.3 billion (down 19%) in June 2018, according to the central bank’s final report.

Duplicate and notional inflows constituted 10% and 12%, respectively, of the analysed 137 tranches of FDI of $50 million each during 2016-17, the report said.

For example, Jindal Steel reported a duplicate entry of $719 million, which accounted for almost half the FDI into metallurgical industries during 2016-17.

As much as 60% of realistic FDI in 2017-18 was attributed to duplicate entries, and almost all of the realistic FDI was notional inflow, the study found.

“Notional inflows are basically transfers of assets and not inflows,” Rao said. “For example, Ambuja Cement showed an inflow of $1,660.59 million, which was issuance of shares to Holcim that had merged with them. This accounted for 77% of FDI cement inflows.”

“The inflow alone will not be able to show the full picture, it is only shows the money that is coming in,” said Rao.

“You need to look at company-level data to know what is happening on the ground,” said Rao. “There is a need to combine data from different sources--company annual reports, central statistical office, RBI, directorate general of commercial intelligence and statistics and ministry of corporate affairs. Countries that manage their FDI are likely to benefit more than those that are managed by FDI.”

(Salve is an analyst with IndiaSpend.)

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