FDI IN INDIAN ECONOMIC GROWTH
Prof. Joseph K. Alexander, Chairman, IIPA KRB.
Economic growth is not mere quantifiable increase in GDP or PCI, but also changes in the modes and mores of production, exchange and distribution of economic goods and hence, the life style of the nation. Increased Investment in infrastructure is the basic need for rapid growth. Lack of it is the real impediment of capital deficit developing economies. Dependence on FDI is imperative. FDI (capital) is international coming for investment.
Y= C+ I+ G+ (X-M). Y= GDP= Consumption+ Investment+ Govt. spending +X-M (export income –import payments). X-M can become positive by more export of goods, or human resources (remittances by our NRIs) or FDI. In this FDI is net of outward and inward FDI. Net positive FDI in effect is an injection of foreign income into the production processes of the host economy. Increase in NRI remittances is also an injection into C or I of host economy. Both will increase demand for the factors of production. Employment and income will get increased impetus. A multiplier increase in income is set in motion. This new impetus cause a chain of growth till it peters down as a ripple in a pool of water. Broad money velocity of (Re) in India is 20.3. FDI of US $.10.1 billion can create US $. 211.12 billion new income in India. Hence all developing countries welcome FDI. China registered phenomenal growth in the last few decades with FDI. In fact they outstripped USA in the first half 2012 in receiving FDI of US $ 59.1 billion against USA’s 57.4 billion.
FDI in USA is FII (Portfolio Investment: stocks & bonds). Confidence in their dollar makes surplus funds all over the World to escalate into USA as safe deposit. This money through financial intermediation of NBFI percolates into corporate industrial enterprises and props up new production and Industrial growth of USA.
In colonial days Britain used FDI investment in the Indian colony to cause economic drain of our resources and wealth into England. Anti-colonial ideology and fear still linger in the minds of some who refuse to open their minds to the new trends and methods of globalised World. They oppose and show hair splitting arguments to show up dangers of FDI like that of Wall Mart in retail trade, insurance, and such areas. Their intrusion sidelines the unorganized masses. They lose their employment & income. This is true to an extent.
This anxiety is due to ignorance and fear of the unknown. All economic activity is for the expected future income. So there is risk. You may fail or may not get the reward you expected. Let us open our mind to the phenomenal growth achieved by China in the last 40 years by pole-waltzing using the FDI pole to jump over the developed world countries.
Economic growth essentially means changes in the methods of production. Old are given up for the more efficient new methods. We moved for power from the water wheel to steam engine, to electric motors, and to solar energy and atomic power. In this process all employed in the old methods lost their employment and found new work in the new technology based activities. This change over agony is inevitable in every new birth of anything including new technology. It is elimination of the uneconomic methods and induction of more efficient new one and hence cheaper goods. Employment and income all over the World has only increased by these changes of modes of production.
The Mom-Pop shops and corner retailers are intermediaries who thrive by increasing the price of goods as retail margin. This makes goods costlier. Retail chain intermediaries increase price of goods.
Supermarkets on the other hand induce vertical chain production from raw materials to finished goods under one roof. Often they do it for themselves like the LuLu Supermarkets of our Yusuf Ali. The massive production with raw materials & intermediate goods & services procured from the cheapest corners of the World and using large scale economies of production make goods cheaper and of better quality. International integration of production processes make retail price less than that of the Mom-pop shops. Those who oppose this new production processes are short-sighted and against economic growth. Do they have some vested interests in retaining under development?
The massive capital movements and flow of raw materials, of intermediate goods and human services across international borders augment production and income all over the World. If any country isolate itself from this, for preserving their old worldly mores and modes of production they will become marginalized (like Old Burma) and remain under developed.
In India Dr. Man Mohan Sing opened the economy for FDI in 1991 under FEMA. Then FDI was less than US $ one billion’. True he was cautious in restricting it to limited industries and a low level of 24 % of those corporates. Gradually he increased this share with great restrictions. This shows his attempt to appease the opposition and his democratic ways. Now because of consistent current account deficit due to heavy imports POL and Gold compel India to seek more opening up for FDIs to cover the deficit. Now, after USA, India and China are the two higher FDI receivers. India received US $. 13.7 billion in 2012 and 10.4 billions in the first half of 2013. Estimate of total stock of FDI in India in 2010 was US $ 1911,000 million (UNCTAD) and 71,226 million (by CIA WORLD FACE BOOK).
India’s economic growth of the last two decades is proof of the pudding. Despite our restrictions on FDI entry and special care of the marginalized, we increased our GDP and PCI many fold of what they were in 1990. Similarly the increase in the Annual growth rate of Kerala from3.5 % of 2000 to 10.6 % of 2007, or rise of PCI from Rs. 21,548 of 1999 to over Rs. 51,000 in 2012 also prove this. In Kerala increased NRI remittances triggered the boost of our GDP and PCI. This is the economics of FDI.