PROSPEROUS INDIA 21

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.” 

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)