India does not depend on foreign investments
We often listen to the experts from within the country
and outside, policy makers and economists telling us that the economy cannot
grow at faster rates unless investments are attracted from foreign countries. Their
argument is that economies like India should make all-out efforts to get
capital from the other countries, as it would not be possible for them to raise
the required resources domestically to achieve higher growth rates.
After the globalized approach became the drive in policy
making, India began to invite foreign investments seriously from the early
1990s. Many of the restrictions that
were in place were slowly removed over time, so that foreign investments could
enter into our territories easily. In
fact the foreign players are being given all sorts of concessions and allowed
to enjoy special privileges.
As a result foreign inflows have increased manifold
during the past two decades. Reserve Bank of India notes that the inflows have
increased from Rs.1, 713 crores in 1992-93 to Rs.2, 81,897 crores in 2010-11. Broadly
the foreign inflows are under two categories, namely Foreign Direct Investments
(FDI) and Foreign Portfolio Investments (FPI).
While the FDIs involve creation of assets with a longer life, FPIs are into
the financial markets with a shorter duration.
Even twenty years after the country started easing policies
welcoming foreign investments, the clamour for outside funds has not ended. It
has increased more during the recent periods. This leads us to the question as
to whether we really require foreign funds. India remained the most powerful economy
with superior levels of prosperity for many hundred years without any outside
financial support, before the Europeans started ‘investing’ in the country. Subsequently
after independence, the economy has been moving forward for forty years with its
own funds. One can say that the growth was slower during these years, but that
was due to the structural issues and faulty approaches.
India was a poor and underdeveloped country in 1947 with
lack of opportunities to save and invest for most of the population. But soon
after independence, people started using all the available opportunities to
prove themselves. The rate of Gross Fixed Capital Formation was 8.4 per cent of
the Gross Domestic Product during 1950-51, while the saving rate was 8.6 per
cent. Capital formation increased steadily over the
years to reach 26 per cent during 1990-91 enabling the economy to consistently
move forward. It is no small achievement for the country, when policy making was
being guided by the socialistic ideology. Subsequently after about twenty years
of opening up of the economy, capital formation stands at 35.1 per cent during
2010-11, with the savings being 32.3 percent.
The main argument for foreign funds is that the requirements for investments
are more than the actual savings. It is called saving-investment gap. Between 2004-05 and
2010-11, the gap has raised from 0.4 per cent to 2.8 per cent. Why this gap? One major reason is the lower savings of the public sector. The public sector savings as
a percentage of GDP has decreased from 2.3 per cent to 1.7 per cent during the
above period. Hence it is the
mismanagement of the state owned sector that propels experts argue for foreign
flows. Why don’t the governments take steps to make them work better and save
more?
India is one of the countries that save more. Apart
from the ‘official savings’ for which the government publishes details, there
are many other types of savings that people undertake. People save through
indigenous methods and make huge investments in gold, which are not taken into
the official savings. Hence the actual savings would be much more than the
official rates. The major part of official savings, about two thirds
or more, is contributed by the household sector, with the balance coming from
the corporate sector and the government sector. Studies show that the
investments made by the non-corporate sector through the family-based enterprises
are totally funded by local finance, with almost the entire requirements mobilized
by entrepreneurs through their own efforts.
The non-corporate sector that contributes about 57 per
cent to the national income does not depend on foreign funds. Experience proves
that the society is capable of generating the required funds when they need it.
How do people generate funds for buying
around one fourth or more of the global gold output annually? How is it that the
ordinary entrepreneurs operate successful clusters with turnovers and exports worth
thousands of crores, with only domestic funds?
It is relevant to remember that the household sector, apart from its own investments, contributes to the major part of investments by the public sector and a significant share of investments in the corporate sector. Of course the corporate sector is also contributing a reasonable share to national savings. Realizing the capacity of India to generate funds, the Report of the Working Group on Savings for the Eleventh Five Year Plan underlined: “On the whole, the overall macro-economic environment in the country is fairly conducive to generate and sustain high level of savings and investments that might provide the resource base for attaining a higher growth trajectory as envisioned in the Eleventh Five Year Plan Approval Document.”
It is relevant to remember that the household sector, apart from its own investments, contributes to the major part of investments by the public sector and a significant share of investments in the corporate sector. Of course the corporate sector is also contributing a reasonable share to national savings. Realizing the capacity of India to generate funds, the Report of the Working Group on Savings for the Eleventh Five Year Plan underlined: “On the whole, the overall macro-economic environment in the country is fairly conducive to generate and sustain high level of savings and investments that might provide the resource base for attaining a higher growth trajectory as envisioned in the Eleventh Five Year Plan Approval Document.”
Moreover the share of foreign funds has always
remained lower in the total investments of the country. Quoting official figures, Mihir Rakshit shows
that during 1992-93 to 2004-05 the proportion of foreign investments was less
than one percentage of GDP on an average. Even when the inflows increased later,
it was not much. Reflecting the position, Reserve Bank of India notes:
“Domestic saving financed more than 95 per cent of investments, and the
remaining by capital flows.”
Macro-levels studies show that the portfolio
investments are speculative in nature and move out of the country any time
causing damage to the domestic financial systems. Nagesh Kumar notes: “As there
are sharp movements in these inflows linked to developments, they become
channels of transmission of instability to the country’s financial system.” Even in the case of FDI, the results are not
positive. Writing in the context of South Asia, he mentions: “The empirical
studies suggest the region has received FDI inflows of mixed quality and the
developmental impact has been uneven.”
An analysis of data over the last sixty years shows
that the rate of increase in investments during 1990-91 to 2010-11 is lesser
than the increases during the previous two twenty year periods namely, 1950-51
to 1970-71 and 1970-71 to 1990-91. Has the free flow of foreign funds dampened
the spirit of Indians to invest more? It is true that there are instances in
which the local industries and domestic players, especially the smaller ones,
are put in a disadvantageous position with the entry of foreign players.
Thousands of units have already been wiped out in different sectors. It is
relevant to emphasize that the foreign investors get enormous state benefits
that are denied to the domestic players. Instead of encouraging the vibrant
domestic entrepreneurship, the policy makers are paving way for their slow
destruction.
In this context, the words of the leading non-resident
Indian industrialist Swaraj Paul come to mind: “ It always pains me to see that
there is a feeling in India that
development can only take place with foreign investments. India is far more
richer and it can contribute a lot to the world economy.”
References:
1.
Economic Survey 2011-12, Government of India, New Delhi
2.
Handbook of Statistics on Indian Economy 2010-11, Reserve Bank of India
3.
Mihir
Rakshit, ‘ On Liberalizing Foreign Institutional Investments’, Economic and Political Weekly, Vol.41,
No.11, 2006
4.
Nagesh
Kumar, ‘ Capital Flows and Development: Lessons from South Asian Experiences,
MPDD Working Papers, Nov.2010
5.
Report
of the Working Group on Savings for the Eleventh Five Year Plan ( 2007-08 to
2011-12), Planning Commission, Govt.of India, New
Delhi, 2006
6.
‘ India does not need foreign investment for
growth’, Lord Paul, Business Standard,
June 13, 2004
(Published in Yuva Bharati, Vol.39, No.10, Chennai,
May 2012)
