Abstract
As one of the world’s fastest-growing economies, India remains a prominent destination for foreign direct investment (FDI) from across the globe and FDI is currently near the top of the agenda for many policymakers and academics. Since 1991, India has undergone a spectrum of changes in its stance towards FDI and presently is one of the most open economies. The ‘Make in India’ (MII) initiative of the present government is often given credit for the surge in FDI inflow in 2016–17. This rightly puts in focus the importance given to the quantum of FDI inflows in assessing the success of the policy, rather than the aspect of quality. The FDI data is pivotal for any analysis concerning the efficacy of various Indian initiatives aimed at attracting foreign investment.
The authors delve into the FDI data dimension of the past decade in India and continue earlier research of the Institute for Studies in Industrial Development concerning the operational dimensions of FDI. This puts the recent surge of FDI inflows in perspective and rightly underscores the distortions in official FDI statistics of the country by examining the inflows at the company/industry level. Given this backdrop, the book is a welcome and timely contribution towards understanding the importance of FDI data and the muddle of evaluating policies based on aggregate inflows. Through authentic examples and quotes from the Reserve Bank of India, policymakers and various official committee and policy reports, the authors try to derive a rich, novel understanding from the standpoint of those in power. The book also provides a strong foundation for stringent policy evaluation. Complementing this with a detailed descriptive analysis of officially reported inflows and actual inflows at company/industry level highlights the pitfalls in using India’s official statistics.
The introduction explains various FDI dimensions from identification and classification to its perceived role in the economy. It also notes the trend of post-MII inflows and India’s lack of preparedness in assessing FDI. The authors accentuate that information regarding the characteristics of the investor is crucial in terms of technology transfer, internationalisation of firms and stability of the investment, which the official statistics fail to capture. The chapter further sheds critical light upon rising concern in the manufacturing sector over the fact that a policy permitting 100 per cent FDI in most branches of manufacturing leaves foreign firms with no incentive to enter joint ventures with domestic firms and restricts the transfer of technology. This is a pivotal aspect and potential of FDI, which India has failed to harness since FDI has become a measure of balancing the ‘current account deficit’.
Chapter 2 reviews changes in the FDI policy in 2016, allowing unrestricted entry into most manufacturing industries, with radical changes in two branches. First, agriculture saw approval for the use of genetically modified seeds. Second, already in January 2015, up to 100 per cent, brownfield investment was allowed through the automated route in medical devices. The authors argue that this rise in the cap of brownfield investment in pharmaceuticals would promote more takeovers and caution that such policy changes could hurt domestic companies.
Chapter 3 begins with a discussion on the trend of FDI inflows and proceeds to explain how the government claims about the success of its initiatives based on official statistics do not portray the full picture. The authors also point out the failure of FDI policy changes through the automatic route, as FDI inflow decreased significantly. The peak inflow of 2016–17 was driven mainly by acquisitions, a type of FDI which does not create new capacity and post-MII India also witnessed a fall in inflow into manufacturing. The chapter concludes by questioning the existing practices of comparison based on period-wise inflows and accentuating the role of realistic foreign direct investment (RFDI) as a better indicator for evaluating the efficacy of FDI policy.
Chapters 4 and 5 form the core of this study, bringing to the foreground the momentous issues concerning official statistics on reported inflows. Examples from various industries demonstrate the problem of delayed and duplicate reporting, incorrect entries and various notional inflows, as certain companies which no longer exist have managed to report FDI inflows. Such problems portray clear-cut lack of consistency in reporting data. As a result, one cannot put faith in policy evaluations based on such statistics. Further, a more in-depth inspection of the brochure highlighting the achievements of the MII initiative typifies the lack of understanding shown by official agencies. The FDI inflows listed in the brochure include inflows pertaining to the period when the present government was not even in power. The classification of firms into specific industries in this brochure is puzzling and the brochure exemplifies that ignoring the associated characteristics of the investor could provide a grossly misleading picture. Chapter 6 gives a brief useful insight into the changes in recent years regarding how FDI inflows are reported. Under the procedural norms, there exists a possibility of delay up to 7 months. However, examples in the book clearly show years of delayed reporting. One must also commend the detailed information given in the tables and other supplementing material reported in the Annex of this book.
Despite the helpful overview that this book offers, it does not cater well enough to a broader general audience. First, the introduction covers many fundamental dimensions of FDI but given the overpowering exposure that potential benefits of FDI have received in the literature, highlighting its negative aspects in the Indian scenario would have added more balance into the chapter. For instance, the negative effect of crowding out offers a possibility and risk of multinational enterprises gaining monopoly power. Moreover, following major FDI policy changes in the health sector, the possibility of such multinational enterprises harnessing monopoly power poses a potential threat to public health. Discussion of such aspects would have deepened this study. Second, while elucidating issues with reporting of data, the authors also explain the pitfalls about various forms involved in capturing FDI statistics. A more detailed explanation of the structure and filing process involved with such forms would have helped readers and would render this segment more lucid.
The book addresses readers who have a working understanding of FDI. The authors make huge leaps between sections that a novice would find hard to comprehend. For instance, while explaining the problem of duplicate reporting, the study also considers the possibility of this issue arising due to defaulters’ anxiety. However, what is this anxiety and how does duplicate reporting keep investors on the safe side? Finally, the study puts much faith in the online portal for reporting FDI inflow introduced in mid-2015. However, without evaluating the efficacy of this new mechanism, simply putting faith in it would be similar to the biased understanding that the official statistics portray throughout this book. Further, given the detailed analysis of what information is not captured across various systems, suggestions regarding the lines of critical information to be included in new procedures would have been a welcome added value.
Notwithstanding the above critical comments, this book still serves as a useful guide to researchers working on FDI. It provides insights into several problems associated with official statistics and would promote a rigorous policy evaluation through careful and better inspection of the existing data. It is a must read for policymakers and agencies involved in drafting FDI statistics in India. The book rightly illustrates that various problems associated with the data could certainly be avoided by less lackadaisical attitudes from various official agencies. Overall, this book constitutes an excellent contribution towards making policymakers and academics aware of the problems associated with FDI statistics in India.