Home >Opinion >Views >Opinion | Differentiating FDI and trade
Attracting FDI in employment intensive sectors can create positive economic and social spill overs.
Attracting FDI in employment intensive sectors can create positive economic and social spill overs.

Opinion | Differentiating FDI and trade

  • India does not need to shy away from investments but certainly needs to be wary of pure trade which limits its potential and drive to produce indigenously
  • Any benign investment at arm’s length that is not hurting interests of India or diluting its competitiveness in any sector should be welcome

Events in the past few days have once again triggered the debate on whether India should continue to allow investment inflows from China while asking its citizens to aim for self-reliance and minimise dependence on goods from across the border. Certainly, this is a smart political argument considering China has invested $4 billion in Indian startups in the past 5 years. This amount would be higher if funds located in tax havens with Chinese ownership are also accounted for.

However, does the economics of this argument hold water? Is trade of low technology products like buttons, laces, crockery same as long-term foreign investments in high-risk new age technology driven products? Is it economically prudent for a country to fulfil all its capital requirements or compromise on innovation due to lack of thereof? Can the impact of unchecked trade volumes be compared with rule-based FDI inflow norms in India?

Trade versus FDI

To start with, trade just helps the country fulfil its requirements of those goods and services (G&S) that may not available in the country; investments provide the capital to build infrastructure that can plug the G&S deficit, even, sell it to other markets. While trade just provides entry of G&S, FDI inflow is a route for transferring capabilities, technology, building linkages, business capabilities etc.

Moreover, ability of FDI to generate employment, public assets, tax revenues and develop markets cannot be ignored, a contribution pure trade of merchandise does not make. Foreign investment does have an adverse impact on domestic markets in the short-run by crowding out domestic competition or investment. India did go through that phase when the newly minted economic aspirations post liberalisation resulted in ownership of assets over and above the necessities. However, today India has a diverse pool of entrepreneurs who have competitive ideas and access to technology. Indigenous markets have strong domestic linkages and access to consumers. In fact, attracting FDI in employment intensive sectors can create positive economic and social spill overs. Notwithstanding the domestic markets, possibilities to increase exports often arise from companies with significant levels of FDI. Unlike a firm that is selling finished or intermediate goods in India, a foreign investor exposes itself to regulatory, economic and geo-political risks of the country.

For example, when we discuss funding composition of the likes of Paytm, OYO hotel chain or Ola, two aspects need to be considered. One, these companies are Indian companies operating under the law of land, creating economic opportunities for the youth and contributing to the welfare of Indian community. Two, success of these ventures is not solely due to the investment, but because of the novelty of the product offering. Investments in start-ups involves high risk; the list of failed start-ups with Chinese investment is bound to be much longer. In the absence of Indian giants comparable to Google, Temasek, Sequoia and SoftBank, we not only run the risk of starving innovation of adequate capital support, we may also end up draining the brain to countries with stronger financial ecosystem for fresh ideas.

Rule-Based and Strategic Investments

Apprehensions related to investments from any country per se, are not unwarranted in India mainly because history suggests foreign investment can potentially lead to acquisition of assets and eventually manifest into economic colonisation similar to one by the East India Company. However, times have changed and so has the world order. Steady inflow of investments can exist without impacting the economic or political stability of the country by practising some of the following recommendations:

- Since funds can be set up outside the home country of the investor or be routed through companies located at tax havens, it is not always possible to map the investor to the country. To solve for this, identify sectors based on sensitivity, investment required, technology, employment and social impact. Any FDI in particularly critical sectors from the point of view of national security or economic stability should be monitored with a keen eye.

· Tighten regulations related to data storage and access by companies through data localisation in these sensitive sectors.

· Extrapolate the offset policy in defence to ensure a certain portion of the profits is redirected towards the small and medium enterprises.

· Thorough due diligence of investors and their networks to glean their strategic intention. This should be monitored by the regulator for any deviation.

· To further India’s interests in nascent sectors such as machine learning, HealthTech, green commute, maximum period for an investor to be invested in a greenfield should be limited to 10 years (most VC’s exit after 8 years).

· All firms receiving foreign investment should have a tangible plan to contribute to India’s exports within the product lifecycle and commit to minimum employment generation.

· Ease listing norms for firms so that funds through public and private placement can be raised by wholly Indian owned companies.

· BSE SME & Start-ups Platform has helped 322 companies raise Rs. 3,320.48 crores from the market. Start-ups should be encouraged to make use of the platform wherever possible. In fact, build incentives like access to market & technology for promoters taking this road.

· Domestic procurement of raw material and intermediate goods has to be non-negotiable as far as possible.

When an investor invests, the overarching purpose is to extract profits. However, the receiving firm continues to reap benefits like fresh investor interests, opportunities to diversify and even take complete ownership of the firm post exit. Yet another opportunity that direct trading of G&S does not provide. Investing in a fresh idea or fresh market is a risky decision and expensive activity dotted with uncertainties. If investors see India as a potential investment destination, irrespective of the country they originate from, surely India is getting a lot of things right. This will also motivate domestic investors to take the plunge and develop a burgeoning network of investors in India. From being treated as a ‘dumping bazaar’ to now attracting investors, India does not need to shy away from investments; it certainly needs to be wary of pure trade which limits India’s potential and drive to produce indigenously. Any benign investment at arm’s length that is not hurting the interests of the country or diluting its competitiveness in any sector should be welcome.

(Gunja Kapoor is a Delhi-based public policy analyst. The views expressed in this article are the author's own)

Subscribe to newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperLivemint.com is now on Telegram. Join Livemint channel in your Telegram and stay updated

My Reads Logout