Criticality of FDI in Manufacturing

What is the issue?

While the FDI flows in the manufacturing sector has already been lacklustre, it is further slowing down now.
This is a cause of concern if India needs scale-up its economy and create more jobs for its people.

What are the status of Foreign direct investment (FDI) in India?

Policy - FDI limits were eased across sectors in mid-2016 to allow foreign firms to own 49% in a venture through the direct route.
Notably, an even greater stake was allowed if the investment venture had access to state-of-the-art technology.
However, most of the partnerships that are currently in the pipeline are in the nature of technical collaborations – with little in terms of FDI.
Stats - Flows into the industrial and manufacturing space have picked up pace in lately, and was estimated to be $17 billion in 2016-17 (double of 2011 level).
But despite this, the amount netted by the manufacturing sector was still far less than the capital flow into the service sector (which continues to dominate).
Notably, sectors like FMCG (where regulations are relatively less important) has netted a fair bit of the FDI into well established companies.
But more foreign capital is needed in sectors like defence to boost our technical expertise and bring jobs to the skilled and unskilled workers.
Insufficient infrastructure, rigid labour laws and an unstable regulatory environment are the probable reasons that hinder manufacturing FDI flows.

Why is FDI critical for the country?

If India is to really scale up its GDP growth and ensure jobs-creation, it is necessary to grow its manufacturing sector.
But capital available with local industrialists is limited, which makes it is critical for India to attract more FDI in manufacturing.
In this backdrop, multiple sectors have been slacking in attracting the needed FDI to help boost the economy and ensure jobs and progress.
Defence - Events like our recent DefExpo generating considerable interests among major defence players around the world.
But despite this, there hasn’t been much it terms of FDI flows into the sector.
This poor state of affairs is indeed partly due to the lack of sufficient orders from the government, which is by default the major defence buyer.
Pharmacy - It is also unfortunate that sectors such as pharmaceuticals aren’t attracting the global players despite India’s large pool of science graduates.
Pharma sector had seen a decline in FDI flow and pulled in less than $1 billion each in FY16 and FY17, lower than the $1.5 billion in FY15.
Automobiles – In the automobiles sector too, just $1.6 billion came through in FY17 compared with $2.6 billion in FY16.
This is despite India’s abundantly cheap labor and a big home market.

What role does FDI play in the Balance of Payment (BoP)?

FDI is also an important factor in the “Balance of Payments” (BoP) equation that is critical to ensure the stability of the rupee.
Also, of the total capital inflow of $240 billion in the 3 previous financial years, FDI along accounted for 55% - (rest came from debt and portfolio equity).
This is a big reversal over the trend in the previous 10 years when FDI accounted for less than 30% of the inflows.
However, in the December quarter, FDI flows weakened though economists believe it could be a error.
Nevertheless, with the price of crude oil now nudging $70, there is a real chance the basic BoP becoming negative in the FY19.

Quick Facts:

Basics:

Current Account Defecit (CAD):

CAD = “Current Account Outflow” minus “Current Account Inflow”
Current Account Outflow = “Outward remittances by foreign nationals in India” + “Profit Repatriation by Foreign Firms in India” + “Cost of Imports”
Capital Account Inflows = “Inward remittances by NRIs from abroad” + “Repatriated Profits of Indian Firms Abroad” + “Cost of Exports”.

Source: Financial Express