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Illusory surge in FDI
I remember an interview with P Chidambaram sometime ago- as I recall, he was being interviewed by an Indian business channel and the interview was in London. He was asked whether the opposition to reforms was not coming in the way of greater foreign direct investment FDI into sectors such as insurance. Chidambaram said he wasn t too worried because largely flows of FDI were happening anyway. If lack of progress on reforms made it difficult for foreign investors to enter some sectors, so be it .
here is a certain smugness, I notice, about FDI since the official figures place FDI at 16 bn. As a proportion of GDP, FDI in India would today not compare unfavourably with China s. I have been taking a close look at the numbers and I find that nearly 8bn of FDI is private equity. Now, private equity is not the same as firm- or MNC- related FDI. It is in the nature of secondary market investment, with no immediate addition to capital stock or jobs.
Now, it s true that FDI from MNCs is also mostly of the secondary market variety, as it happens through mergers and acquisitions. But there is always the prospect of additions to capacity down the road, infusion of technology and export linkages with the parent. With private equity, you have a ruthless focus on efficiency- and this often takes the form of asset-stripping and paring of jobs- but the other benefits that arise from MNC FDI are not there. Much of the private equity flowing into India has gone into the services sector,including real estate. It is more akin to stock market investment with the prospect of additional gains from an appreciating rupee.
ake away the private equity component and changes in accounting practices in relation to FDI and the figure of FDI in 2006-07 falls to 5 bn. It does seem that the hype over FDI in India is misplaced. More on this in my latest E column, Are FDI flows into India for real?
Labels: Indian Economy
Posted in Microsoft picture it! photo premium 9 on December 11, 2008
Original article: Illusory surge in FDI
Tags: fdi, equity, private, india, bn
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