The Great FDI Push

The Great FDI Push

Recent announcements about foreign direct investment (FDI) targets being doubled to $50 billion for the coming fiscal, along with 100 per cent FDI being permitted, and encouraged, in Defence Production, the Indian Railways, and large Infrastructure projects, are welcome boosts to the moribund state of the nation’s GDP, languishing at a poor 4. 5 percent.

Other reports that state many large projects, stuck for lack of Government clearance, are about to be given the go ahead. Collectively, they account for tens of thousands of crores in investment, many involving some FDI component, and should in turn boost the economy, provide jobs, help modernisation.

Public Sector Banks holding large non-performing asset (NPAs) portfolios, due partially to long-term lending to stuck infrastructure projects, are heaving a sigh of relief. This new thinking will turn some of these ‘bad debts’ into good, in anticipation of better times ahead.

And the rise in foreign exchange reserves of some $11 billion since March has eased the liquidity position as well. The hawkish stance in the Reserve Bank Of India (RBI), with regard to inflation and consequent high interest rates is also starting to change, with a likely pause in further raising of rates, and a number of quiet concessions to growth implemented already. These include an easing of controls on gold imports and the lifting of restrictions on annual foreign exchange transmissions abroad of up to $200,000 per individual citizen.

But while policy announcements welcoming FDI do not tantamount to actual flows of foreign exchange into the country, the Modi Government’s  prompt announcements in this regard signal a marked shift in stance. FDI is now being regarded as a nation-building tool. The areas in which it is being robustly encouraged call for billions, even trillions of dollars, and are all long-term and strategic in nature.

Defence Production in particular, can transform the fiscal situation. India currently imports,$8 billion worth of defence equipment annually. Again, even though the defence forces are starved of  the latest equipment, the defence budget has been growing, partly due to inflation, at an average of 13.4 per cent annually since 2006. Still, we spend much less on our defence needs in proportion to our GDP, than either Pakistan or China.

But with nearly 70 per cent of our defence requirements imported, including practically all the high value and high tech items, India could benefit enormously from indigenous production of weaponry.  Even the 30 per cent produced in our ordnance and other defence production facilities, have a large amount of foreign componentry.

The boldness of inviting the weapons manufacturers of the world to set up shop in India on a 100 per cent FDI basis in chosen instances, will also get us away from the dismal performance both in terms of original research, and adhering to time frames, of outfits like the DRDO.

There is little point in reinventing the wheel when we are so far behind, and when the latest high technology exists  with various countries/vendors abroad, and could, with the right amount of Indian Government determination, go swiftly to operationalise our armed forces with the latest equipment. India has leapfrogged from primitive cars locally produced, to the world’s latest and best, locally assembled, and gradually indigenised, by a similar change in policy.

We should however take for granted that we will not get the best cooperation, or terms, from the US, most Europeans barring the French, or even the Russians, but will do well with the Chinese, the Japanese and the Israelis.

The West is reluctant to hand over its latest technology and has even made a dog’s breakfast of  operationalising the Civilian Nuclear Deal. Still, with the global geo-political and economic shifts in the balance of power going deeper into the 21^st century, they may be persuaded to change their minds.

Meanwhile India has built its own nuclear submarine, after many cost overruns and delays, and it is in the process of undergoing final stage trials.  India has also partially built its own aircraft carrier and given the budgets necessary to complete the project, could be one of just 5 of 6 countries capable of making its own aircraft carriers.

China, of course, already makes its aircraft carriers, nuclear submarines, its military aircraft, its nuclear warheads and missiles and so forth. We make our nuclear capable missiles too, stealth frigates for the Navy, smaller ships for the Coast Guard, but have been struggling to make a proper battle tank or a fighter for decades.

We are indeed miles away from being self-sufficient in military software and hardware today, but with a sea-change of attitude, a realistic appraisal of our true position, much is possible.  With mutually sustainable and beneficial joint ventures with foreign companies, private sector participation, and yes, 100 per cent foreign owned defence production facilities here in India, there is nothing conceptually to hold us back. 

For the moment, FDI will become, in Narendra Modi’s first term, a key instrument to revive our shattered economy and provide new jobs. But implemented soon, with multiple projects on the ground, it could, along with similar bold leaps in the Railways and Infrastructure projects, also become a strategic tool to leverage India into the topmost ranks of nations in the coming decades of the 21^st century.    

(888 words)

May 31^st, 2014

Gautam Mukherjee