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Self-reliance, Indian style

The uncertainty over the Tata-SIA airline is the latest episode in the long-running Swadeshi versus Videshi drama. Anindya Sen, Subrata Sarkar and Rajendra R Vaidya examine the economic evidence and ask if foreign investment poses a threat to Indian economic sovereignty.

It has to be noted that the concept of self-reliance has changed. At one time, the national policy was to achieve self-reliance in the core/ priority sectors of the economy. However, industrialists in general now seem to feel exactly the opposite, i e, that FDI is definitely needed (say) for building up of infrastructure, but restrictions should be placed on consumer goods sector investment. One reason might be that the weightage has been shifting from agro-based industries to those where infrastructural constraints become binding.

At the same time, there is the perception that the Government of India can no longer foot the bill for the huge amounts needed in the infrastructure sector. It has also become increasingly clear that in most sectors, indigenously developed technology is light years behind the technology developed abroad. Therefore reliance on indigenous technology will not get India anywhere in the world economy and there is a need to form partnerships with foreign firms to get new technologies.

Finally, the private sector's support for FDI in the infrastructure sector seems to rest on the perception that (a) the private sector itself does not have resources to enter this sector, (b) that only the public sector, anyway discredited, has to make space for FDI in this sector. Moreover, (c) the product differentiation here is generally minimal (electricity is electricity no matter who produces it and how) so that there is little fear that once the MNCs enter this sector, they will be able to establish brand images and foreclose all possibility of future entry.

Foreign Investment Inflows (US $ million)

                          1993-94      1994-95       1995-96      

Direct Investment         586           1,314          2,133         

Portfolio Investment      3,649         3,581          2,214         
 
Direct Investment
as per cent of total      13.84         26.84          49.07        
investment                                                                   

Source: RBI Annual Report 1995-96

How has FDI responded to the new, liberalised regime and how far are the concerns expressed by the proponents of Swadeshi valid? While FDI has shown a sharp increase when compared with pre-1990s years, it is still minuscule when compared with FDI into a country like China. Last year, China received $38 billion in FDI, compared with the $2 billion received by India.

Of the total foreign investment, a larger share has been coming from FDI.

There has been a big gap between approved and actual FDI, pointing to the existence of hurdles in the way of implementing foreign investment plans. But the percentage of actual to approved FDI steadily increased till 1994-95. In 1995-96, there was a big jump in approvals which brought down sharply the percentage of actual to approval, even though in absolute terms actual FDI went on increasing.

FDI : Approved and Actual (Rs, million)

                 Approved           Actual              Actual/Approved    
                                                             (%)                

1991-92          11,700              158                   13.5               

1992-93          55,250              881                   16.0               

1993-94          74,640              1,314                 17.6               

1994-95          99,730              4,132                 41.4               

1995-96          371,130             6,750                 18.2               

Source : CMIE Monthly Review of the Indian Economy. August 1996

Foreign Collaboration Approvals, (1991-August 31, 1996)

              Number of Approvals       Total Investment (Rs millions)
                                                   
1991                  950                            5,300                      

1992                1,520                           38,900                     

1993                1,476                           88,600                     

1994                1,854                          141,900                    

1995                2,337                          320,700                    

1996                1,498                          221,400                    

Source : SIA

During the first eight months of 1996, FDI touched Rs 57,150 million as against Rs 63,702 million in 1995 (calendar year). The percentage of actual inflow to approvals improved to 25.8% during this period.

The number and amount of foreign collaborations have gone on increasing:

A breakdown of Foreign Collaboration Approvals reveals that the larger part went to core, priority sectors: telecommunications (25%), energy development (21%), transportation (6.5%), metallurgical industries (6.3%) and chemicals (6%).

But while the pattern of industry-wise inflows of approved FDI indicates the importance of core sectors, the figures of industry-wise inflows of actual FDI reveal a different picture. The actual FDI into domestic appliances, finance, services, electronics and electrical equipment and food and dairy products combined accounted for 29.3% of the total actual FDI in 1992-93, 44.9% in 1993-94, 47.4% in 1994-95 and 41.2% in 1995-96

Of this subtotal, the share of finance increased significantly from 1.3% in 1992-93 to 19% in 1995-96. The share of domestic appliances shot up to over 12% in 1994-95 but was negligible the following year. The share of services, electronic and electrical equipment and food and dairy products also has shown no clear trend.

Excerpted from India Development Report, Edited by Kirti S Parikh, Indira Gandhi Institute of Development Research, Oxford University Press, 1997, Rs 265, with the publisher's permission.

Swadeshi versus Videshi, continued