Abstract
Professor Chalapati Rao from the Institute for Studies in Industrial Development and Professor Biswajit Dhar from the Centre for Economic Studies and Planning of Jawaharlal Nehru University have compiled an original study on foreign direct investment (FDI) in India. This comprehensive and accessible book will be of great interest to a wide readership, which includes economists, lawyers, policymakers and academics. The study examines a crucial but often neglected aspect of FDI, its reporting and measurement. The study’s central claim is that Indian policymakers have paid insufficient attention to the quality of FDI reporting, focussing instead on the overall quantity of capital inflows. Rather than engaging in a theoretical discussion on the virtues of FDI, the study puts under rigorous scrutiny the process of data gathering and the calculation of FDI inflows. Though the authors do not take an ideological stance against FDI and, in this respect, the study has a seemingly more modest goal, the fact that their assessment clearly indicates that the reporting of FDI by Indian agencies lacks both accuracy and detail carries serious implications for FDI policymaking and analysis.
In the introduction, Rao and Dhar provide a useful overview of the origins and main rationale of FDI. As they explain, the objective of FDI is twofold, to facilitate the transfer of advanced technology from the investing economy to the host country and to promote technical skills in the local population. This dual objective, their assessment shows, sits uncomfortably with the increasing reluctance to invest significant financial resources in countries with a less developed industrial base and a complex regulatory environment, especially in a context of unprecedented economic competition. Against this background, policymakers in South Asia and other developing regions often ignore the main goal of FDI and set out policies which have only one objective, namely injecting foreign capital in the economy. As Rao and Dhar eloquently put it, ‘attracting large amount of FDI has captivated the psyche of the policymakers, including Indian ones’ (pp. 4–5). This trend is perfectly embodied by the Make in India (MII) campaign, which the Modi government launched in 2014 to encourage investment in multiple economic sectors.
Having provided a conceptual analysis of FDI, Rao and Dhar proceed to present the regulatory changes that followed from the launch of MII (pp. 19–28). As a result of the reforms announced by the newly elected BJP government, the FDI policy was significantly diluted. The immediate desire to attract capital inflows led to the removal of entry rules that were regarded as a barrier to foreign investment. For Rao and Dhar, a focussed and sectorial approach therefore gave way to ‘the generalised objective of attracting foreign investment irrespective of its specific attributes’ (p. 3). Under the new rules, all investments by outside entities are treated as FDI. Problematically, ‘foreign’ investors may be in fact returning natives or non-resident Indians (NRI). In this scenario, capital re-entry will not lead to technology transfer, because the investor will move back his/her financial assets to qualify for tax exceptions. Likewise, the foreign origins of the investor do not guarantee that the capital transfer will produce systemic benefits, as FDI may be driven by profit considerations only.
As the authors of this study emphasise, the MII campaign and the set of reforms it initiated show that attracting large shares of foreign investment went from being a tolerable necessity towards an economic imperative, reflecting a deep cultural change among government officials, but also in international institutions (p. 11). In this new cultural and regulatory climate, scrutinising the character of investors and investigating the real motives behind their decision to invest may be considered an unnecessary nuisance, especially when considered against the sensational increase of capital transfer recorded in the aftermath of the MII campaign. In the face of a global economic downturn and generalised fall in FDI, even the World Bank celebrated the reported rise of 50 per cent in FDI and the record-high $60.08 billion inflows registered in 2017 by Indian agencies. Since such unprecedented figures prompted widespread praise and enthusiasm, Rao and Dhar embarked on a painstaking assessment of the veracity of these numbers. Their study demonstrates that official reports are marred by serious inconsistencies, deficiencies and errors.
Of the various problems detected, the assessment emphasises the relevance and impact of structural problems such as delayed reporting. This is an especially serious issue because ‘[w]hen assessing the impact of the new policies and programmes, even a month’s delay could alter the conclusions’ (p. 58). In spite of this, official reports are replete with cases of delayed reporting, and even non-reporting. In addition, the authors have detected the intertwined problem of duplicate entries which may artificially ‘boost inflows into specific sectors’ (p. 119). On top of delayed reporting, non-reporting and duplicate reporting, the issue of incorrect entries is also highlighted. Although many investments, due to their size, would by themselves suggest a surge in FDI in specific sectors, in several cases, Rao and Dhar could not find any supporting evidence. Another serious issue identified originates in the inappropriate industrial classification used by agencies, which contributes to misrepresenting inflows in specific sectors.
Far from being an economic triumph, then, the systematic flaws and numerous omissions detected by Rao and Dhar cast serious doubts over the real amount of annual inflows registered after MII. Rather than raising Indian competitiveness in the global market, policy changes may have made entire sectors of the economy more vulnerable to the harmful effects of the global value chain. In this context, the authors remark that the attention of policymakers should neither be focussed on unreliable statistics nor on indexes that merely reflect how investor-friendly the economy is. ‘Instead of benchmarking against FDI into other countries’, they warn early on, ‘India’s inflows should be assessed from the viewpoint of its sectoral needs’ (p. viii). Accordingly, the objective of their assessment goes beyond sensitising stakeholders about the flaws in reporting practices. The more ambitious goal is ‘to impress on the authorities [the need] to take corrective steps urgently’ (p. 17).
Their call is all the more justified since governments in the past failed to respond to recommendations put forward in studies calling for comprehensive change. The assessment reviewed here shows that, as things stand, the Indian government and its agencies cannot judge the efficacy of particular FDI policies and, even more so, the impact of grand initiatives such as MII (p. 122). Indian policymakers must, first of all, be able to provide the right input based on reliable information. But collecting accurate data is just the beginning of a more extensive overhaul. As Rao and Dhar underline (pp. 123–4), time and resources saved should be devoted to data analysis, ensuring that FDI is used in conformity with its rationale. For this reason, they argue that the government should seek the collaboration of Indian universities and research centres, instead of restricting data access. Besides this, the authors also advance concrete proposals to improve FDI policy, including a classification which should provide a more realistic account of FDI inflows (pp. 38–9).
One can certainly hope that these proposals will be taken on board and that India will take the lead in a new era of FDI policy. FDI has come to be seen as a safe and quick strategy to attract foreign capital not only in the subcontinent, but globally. Virtually everywhere, the success of regulatory reforms is exclusively evaluated in terms of the quantity of capital attracted. It is therefore likely that the problems identified in this assessment prejudice the development of good FDI policies in other countries. This accessible book is therefore a must-read, because it makes a compelling argument for FDI policies to reflect, and be measured against, the essential objective of promoting technology transfer, developing human capital and encouraging innovation. Admittedly, its authors do not aspire to construct a universal model. Yet, this book constitutes a building block that policymakers and analysts engaged with the many questions raised by FDI should use to formulate evidence-based and tailor-made FDI policies, in India and elsewhere.