ECONOMIC HIGHLIGHTS
New Delhi, 29 November 2005
Economy on Upswing
Sustaining
High Growth Rate
By Dr. Vinod Mehta
India’s economy is enjoying a high rate
of growth for the past few years, despite not-so-good performance of the
agricultural sector. The current rate of growth is around 7% with the
manufacturing sector booming. The agricultural sector is also expected to
perform well. The Finance Minister feels that this growth rate can be pushed to
8% provided we increase investment as well as push FDI. The Deputy Chairman of
the Planning Commission feels that this growth rate can be pushed to 10% but
the coalition politics is coming in the way.
The economy is on the upswing. It is not only the
computer software sector but the traditional manufacturing sector like steel,
cement etc., which is leading the upswing.
The economists believe that the upswing in the manufacturing sector will
continue. The National Council of
Applied Economic Research has already projected the GDP to grow by about 7%
during the next three years. The
manufacturing sector is expected to grow by more than 6.21%, infrastructure by
6.54% while mining and construction by 5.89%.
The farm sector which saw a decline of 3.1% in 2003 is expected to grow,
which in business terms implies increased demand for manufactured products in
the coming years.
Apart from this, the economic reforms of the past one and a
half decade have made the Indian industry by and large competitive in the
international market. With foreign
exchange regulations being relaxed in a phased manner, the Indian industry is
acquiring manufacturing units abroad.
Some have started acquiring new technologies to stay competitive. For instance, the Indian motor parts
manufacturers were initially opposed to the inclusion of motor parts in the FTA
(free trade area) between India
and Thailand,
but now when it has been signed, they are now scouting for new processes and
technologies in the South East Asian and other countries.
At the moment, India
and China are enjoying
relatively high growth rates China
around 9% and India
7%. This has particularly attracted the
attention of foreign investors who wish to set up manufacturing bases in India or invest
in the service sector. This is high time
that we have a foreign direct investment (FDI) policy which covers all the
sectors of the economy, except for those sectors where the state feels that
there should be no foreign investment, as in the case of atomic power.
Foreign direct investment in the manufacturing,
infrastructure and other sectors of the economy is much better than commercial
borrowing or investment in scripts by foreign institutional investors. The investment by foreign institutional
investors (FII) could be considered as hot money which can be withdrawn
by them at any time depending upon their judgment of the economic scene. The FDI in manufacturing, infrastructure etc.
leads to the creation of assets which will remain within the territorial
boundaries of the country if, the foreign investor wishes to withdraw from the
company for some reasons.
At the moment there is no single policy on FDI and there is
some kind of ad hocism in it. It
varies from sector to sector. In
insurance business, the FDI cap is 26%; in the banking sector been set at 74%; in certain cases 100%
foreign equity is allowed while there is automatic approval in some cases where
foreign equity participation is up to 51%.
There are certain areas like real estate where no FDI is allowed at the
moment.
Moreover, foreign companies are not as yet allowed to take
over sick companies. There are a number
of them in the textile sector, bicycle manufacturing sector or there are
individual public sector undertakings like pharmaceuticals and photo films
which could be allowed to be taken over by foreign companies with salutary
effect. This will not only bring in new
technology and new management system but also turn them into profitable units.
In the past the Foreign Investment Promotion Board (FIPB)
has been a big failure in attracting
foreign investment. As early as
in 1997, while speaking at the plenary session of the Economic Summit,
organized by the CII and World Economic Forum, the then Industry Minister observed: ”Foreign funds can find their own
direction. It is my personal opinion
that the FIPB must go. There should be
no Central interference in matters related to inflow of investment.” Last
year an Investment Commission was set up
to advise the Government on FDI, while the role of FIPB was changed. But the
observations of the former Industry Ministry on the FDI are still relevant.
Sometime back the
Department of Industrial Policy and Promotion (DIPP) is already reported to
have made a proposal to allow a maximum
of 76% stake in the form of FDI across all the sectors, including the real
estate. This is as good as 100% FDI as
it will allow full management control to the foreign firm. But at the same time
it will also be obliged to disclose its financial results; at the moment 100%
owned foreign companies are not expected to make any disclosures.
The other feature of DIPP proposal is that the balance of
24% equity would have to be sold to the Indian public. It means that the Indian investor will be
allowed to share the prosperity of the foreign firm. But it is much more than that—24% equity to
Indian public means that the liquid stock (shares that are regularly
bought and sold in the share market) will grow which is not only good for the
stock exchanges but also for the widening of the share market. It may also have positive impact on mutual
funds and the proposed pension funds.
If we can have such a policy as proposed by the DIPP with
suitable modifications, one can expect a large inflow of FDI into India. The timing is very important; and that time is here! The economy has
finally come out of the Hindu Growth Rate (about 3%) and FDI can provide the
necessary push.
It may be mentioned that not only the developing countries
but also the developed countries are looking for opportunities to increase inflow
of FDI. A study prepared by the FICCI
three years ago stated that countries like Germany
and France
still allow investment allowance or accelerated depreciation to foreign direct
investors. China grants 10-year tax incentive
to promote firms engaged in infrastructure, energy sector and knowledge
industry. South Korea provides special
incentives for capital investments. Countries like the Netherlands, Denmark,
Belgium, Spain, Switzerland, Luxembourg provide tax incentives; they follow the
concept of group taxation.
If India encourages FDI it will not be doing something
unusual or against its own interest. The
FDI in the current context would mean creation of assets, creation of more jobs
and competitive economy; it is also likely to contribute significantly to the
exchequer in the form of direct and indirect taxes. Therefore, the Left parties
as well as opposition parties should have a realistic approach to FDI and
should welcome it in almost all the sectors, including real estate and retail
except for certain sensitive areas like atomic energy.
(Copyright, India News and Feature
Alliance)
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