The Hindu Business Line : FDI, forex and foreign trade

In a milieu of widening current account deficit and the need for massive funds for long-term projects in infrastructure and many other sectors, the Government has been working to liberalise Foreign Direct Investment (FDI) norms.

Opposition and all cannot take away from the importance of FDI to bridging the gap between domestic savings and investments. The gross domestic savings and the gross domestic capital formation stand at 29 per cent and 30 per cent of GDP respectively.

Corporates seek FDI

For the coveted 10 per cent growth, the investment rate will have to increase to 40 per cent, which means that the domestic savings rate and FDI have to rise. Access to foreign markets, technology, machinery and equipment, and the increased mergers and acquisitions, joint ventures and equity participation have increased FDI flows substantially into many industries particularly automobile, electronics, software, telecommunications, cement, sugar, hotels and consumer goods.

FDI is permitted in almost all industries, and corporates have resorted to this source on a large scale. But it may be worthwhile knowing to what extent FDI-receiving companies generate exports.

Deficit in foreign trade

On the basis of Reserve Bank of India data, `FDI companies' are in deficit in their foreign trade. For instance, in 2003-04 their exports trailed imports by a significant margin. The details of import by these companies show interesting facts; they, for instance, spent about 8 per cent of their export receipts on raw material import.

The foreign exchange expenditure on capital goods is more than 56 per cent of their export receipts. They spend nearly 24 per cent on dividend payment, royalty, interest on foreign borrowings. Another 10 per cent goes as technical fee, professional consultation and such other items.

There is clearly a massive outflow of domestic resources from `FDI companies' and this needs to be reduced. Surely, these companies can improve their research and development strategies to innovate so that the outflow on account of royalty and professionals can be reduced. Indian companies need to invest heavily in in-house research and diversify their products leading to an increase in productivity and a decline in the cost per unit of output.

The private corporate sector consumes relatively a larger portion of foreign exchange that is earned by small-scale units. According to latest figures, the small sector accounts for 40 per cent of the country's exports but use 20 per cent of the total foreign exchange consumption by the medium and large companies.

Though the Balance of Payment position is satisfactory, despite the high imports and the rising level of trade deficit, the policy-makers should not be complacent. Corporates that use FDI should make every effort to export.

FDI in infrastructure

This concern appears more relevant when one takes into consideration the entry of FDI into infrastructure projects, such as power, which cannot generate exports.

The outflow on account of servicing the FDI and related services will grow massively and in that situation `FDI companies' will have to generate more exports. An obvious route is to have agreements with FDI providers to participate in export promotion in other foreign markets.

(The author is a former Economic Advisor to SEBI. The views are personal.)

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