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Centre and states should be cautious in implementation of FDI

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29 Jun 2013, 06:36 PM
 FDI in India: Boon or bane?
FDI in India: Boon or bane?

New Delhi: What is this FDI, which can bring the Parliament of India to a grinding halt, why it has become a political debate that a coalition partner had to withdraw its support from the government at the outset of this issue and the opposition took it to the streets to oppose with tooth and nail. Why would a country seek FDI, an acronym for Foreign Direct Investment, if it had actually managed without it till the conception and relevance of FDI in India ? Why would any country want a foreign operator to hold a stake in Indian companies and then possibly allow to increase its stake to 100 percent in due course of time, thereby losing all control over it? So far, only 12 of India's 28 states have supported the FDI policy of the Central Government that allows 51 percent foreign stake in multi-brand retail. Most of these states are ruled by the Congress party, which heads the ruling alliance at the Centre. So, why is it that majority of the governments in India are wary of implementing the FDI policy?

Let us have a look at the pros and cons of FDI; if at all, it is indispensable, is it really the monster that it is being made out to be or will we have to accept it as the necessary factor for overall growth in competition with the International market?

Need for FDI    
 
• Domestic capital is insufficient for the economic growth of the country

• Foreign capital is usually essential in the process of developing the capital market, at least as a temporary measure

• Foreign capital helps in enriching the business expertise, knowledge and understanding the global market

Major benefits of FDI:

• Improves FOREX position of the country

• Helps in employment generation

• Helps in transfer of new technologies, management skills and enhance global market understanding

• Enhances the competition spirit among the local market which further leads to enhancement  and this brings higher efficiencies

• Helps in increasing exports

• Increases tax revenues

Why opposition:

• Domestic companies fear that they may lose their ownership to overseas company.

• Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be weeded out of the market.

• Large giants of the world try to monopolize and take over the highly profitable sectors and this hurts the local market.

• The foreign companies invest more in machinery and intellectual property than in wages of the local people. Thus no benefit in raising the living standards of the local people.

• Government has less control over their functioning.

CONTROVERSIAL FDI IN MULTI-BRAND RETAIL

Timeline for FDI in multi-brand Retail

September 14, 2012: Opting for big-bang reforms, the UPA government allowed politically-risky 51 percent FDI in multi-brand retail, 49 percent investment by foreign airlines in aviation sector and foreign investment in power sector. FDI cap in broadcasting was raised from 49 percent to 74 percent and sale of equities in four PSUs including Hindustan Copper Ltd (9.59 percent), Nalco (12.15 percent), Oil India Ltd (10 percent) and MMTC (9 percent).

14 September- November, 2012: The decision faced severe criticism from the Opposition and the then key ally of UPA, TMC. The Opposition demanded debate on FDI under Rule 184.

December 5, 2012: Opposition’s motion against FDI in Lok Sabha was defeated. A total of 471 members of the House participated in the voting out of which 218 members voted in favour of the motion moved by Leader of Opposition Sushma Swaraj whereas 253 members voted against it.

Earlier, the 22 members of Samajwadi Party and 21 members of BSP chose to walk out of the House before voting took place paving the way for government’s victory. Abstention of the members of the two parties reduced the magic number from 273 to 251.

Opposition leader Sushma Swaraj mocked the government that out of the 18 parties participated in the debate in favour of FDI, only four endorsed it.

December 7, 2012: Retaining the Lok Sabha victory, UPA government defeated the Opposition’s motion against FDI in multi-brand retail in Rajya Sabha. 123 members voted against the motion while 109 voted in favour. Samajwadi Party, which has nine members in the House, staged a walkout. Bahujan Samaj Party appeared standing with the government as Mayawati chose to vote in favour of the UPA government.

Key aspect of FDI policy in retail:

• States to decide on implementation: Individual state governments will decide whether to allow foreign supermarket chains to enter. The Congress party-led government hopes this will take the sting out of opposition from regional parties who say the policy will destroy jobs.

What experts said?

Sandip Somany, president, PHD Chamber of Commerce and Industry

"FDI in multi-brand retail is seen as a very important reform to revive the economy and it will ease supply side pressures and mitigate inflation and benefit, especially, the small and medium enterprises by way of greater market access and higher profit margins.”

A Sakthivel, chairman of the Apparel Exports Promotion Council (AEPC)

"It will give the much needed fillip to the entire textiles industry. Employment opportunity will be created in plenty. Manufacturing activities will get a boost. The overseas investors would help create better infrastructure in India's retail sector that would benefit farmers as well as end users.”

"Farmers will get better price of the produce as well as consumer will derive value for their money. It will lead to easing of inflation in the country. Gradually GDP will pick up and economic outlook will improve," Sakthivel said.

Ajay Jakhar, chairman, Bharat Krishak Samaj

“The government should have done more to address the concerns of farmers. We are not exactly thrilled as we would have hoped for more conditions to help farmers become a part of India's growth story.”

inakiranjan Mishra, Partner Retail, Ernst and Young, Mumbai

"This time the way the government decided to implement the decision to allow foreign players is smart. Now there is no pressure on states who do not want to implement it."This should calm the opposing allies and the opposition parties."

"When Value Added Tax was introduced, states had the option to choose whether they wanted to implement it in their states and eventually everybody opted for it when they looked at its benefits. FDI in retail should be a similar case."

Praveen Khandelwal, General Secretary, Confederation of All India Traders

"It is unfortunate that despite opposition from their own allies they have chosen to again reopen foreign investment into the sector. It is surprising the government has again reopened the sector without announcing any solid measures to protect small traders.

"We will oppose this move even more strongly this time and are hopeful the government will roll back its decision just the way they did last time."

Siddhartha Sanyal, Chief India Economist, Barclays Capital, Mumbai

"This is not a coincidence but looks like a gameplan to meet some possibly internally set deadline as the government might want to go back to the rating agencies and try to convince them with these measures. The reason for the timing also could be because the political cycle is coming to a close in a few weeks time with Gujarat elections in November."

"The positive impact could be on stocks which should have a positive kickback impact on disinvestment and, therefore, fiscal consolidation. In a situation like this, improved sentiment will have a broad impact. I don't think the market will behave very negatively even if there is a marginal roll back because market will focus on the positive actions."

FDI IN INDIA

An Indian company may receive Foreign Direct Investment under the two routes as given under:

Automatic Route: FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

Government Route: FDI in activities not covered under the automatic route requires prior approval of the Government which is considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, and Ministry of Finance.

 

FDI IN INDIA: FACTBOX


• India an ideal FDI destination.

• Mauritius, Singapore, US and UK were among the leading sources of FDI for India.

• As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware.


• A recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012. India has seen an eightfold increase in its FDI in March 2012.


• According to Ernst and Young survey in 2011, India is 4th global destination in terms of FDI projects, 3rd global destination in terms of FDI value, 73 percent of business leaders surveyed are keen to invest in India, India attracting developed economies as 51 percent of FDI projects are coming from US, Germany, UK and France.


• According to World Investment Report 2013, FDI inflows to India dropped by 29 percent to USD 26 billion.


• UNCTAD 2013 report says, the Indian economy experienced its slowest growth in a decade in 2012, and also struggled with risks related to high inflation. As a result, investor confidence was affected, and FDI inflows to India declined significantly. But the study contends that the country’s FDI prospects are improving.

Prohibited sectors where FDI is not allowed:

• Atomic Energy
• Lottery Business
• Gambling and Betting
• Business of Chit Fund
• Nidhi Company
• Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations)
• Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in notification
• Trading in Transferable Development Rights (TDRs)
• Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes


FDI CAP IN DIFFERENT SECTORS

The government is mulling over revising the FDI cap in different sectors. In this regard, an inter-ministerial meeting will be held on July 1.

 

JPN/Agencies

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