One of the most important activities of the IFD project is to form a National Reference Group (NRG) in each of the partner countries. The purpose of creating an NRG is

1. To monitor the quality and content of research outputs generated,

2. To create a sounding board which could be used for advocacy on foreign investment regimes in these countries and

3. To discuss International Investment Agreements and the investment issues at the World Trade Organisation (WTO) and deliberate on strategies which could be used by developing countries on investment issues at international forums.

The first Indian NRG meeting was held in Jaipur on 12^th January 2002. The participants in the meeting discussed the Preliminary Report on investment regime (Report A) pertaining to India by Biswatosh Saha of Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur. They also discussed FDI policy context in India and investment in context of the WTO. The meeting was co-hosted by CUTS and National Council of Applied Economic Research (NCAER), New Delhi.

The report includes an overview of macroeconomic picture, main policy trends as well as trends in foreign and domestic investment over time. Parameters of investment policy includes registration, rights to entry and establishment, investor protection, dispute settlement, international investment agreements, taxation, movement of capital, intellectual property rights regimes, performance requirements, incentives for investment, regulatory regimes and regulation on competition, environment and labour. This study is based on the existing literature, surveys and reports and was presented and discussed at the Launch Meeting of the project on 13-14 December 2001 in Jaipur, India.

India’s economic reforms program was undertaken in 1991. The provisions in the new foreign investment policy regime are automatic approval of investment, liberalisation of inward investment flows, a small negative list of industries and full repatriability. The report highlights the reasons for attracting foreign direct investment (FDI) as capital constraint in developing countries, the need for improved technology and penetration of export markets. Compare the investment experiences of India and China. In China there is considerable rerouting of capital: a large quantity of capital flows out and then flows in as foreign investment to take advantage of the incentives structure for foreign investors. About 40% of FDI in India is in form of mergers and acquisitions (M&As) which are not technology or export intensive.

The main purpose of the National Reference Group (NRG) meeting was to attract attention to the project at a national level. Parliamentarians/politicians, officials from key national and sub national government ministries, government agencies, quasi government bodies, business representatives, civil society organisations with an interest in economic issues, trade unions, academia, media, economists and lawyers were invited to comment on the Preliminary Report. A copy of the report had been sent to the members of the NRG in advance.

Comments on the India report

Several comments on this report were received from the NRG members as well as from the participants of the meeting:

Some commentators suggested that more information could be added such as:

· Analysis on the objectives of government in liberalising FDI flows: whether to have increased exports, higher employment or technology transfer.

· the report could examine why FDI performance is so dismal; some of the reasons which are cited are:

i. anti-export foreign trade policies

ii. rigid labour laws

iii. weak infrastructure

iv. policies discouraging foreign trade policies by setting caps on foreign equity holding

v. high transaction costs of carrying out business in India

vi. the slow pace of economic reforms, uncertainty of coalition politics & global economic slowdown

· We could look at comparative tariff levels and examine whether foreign investment is flowing into India to jump a tariff wall.

· The importance of Foreign Institutional Investors (FIIs) declined in the late 1990s vis-à-vis FDI. The report could examine the reasons behind this trend.

· Regulatory problems in infrastructure should be discussed in the report for example in India a large number of foreign telecom companies have withdrawn due to regulatory hassles

The participants discussed the phenomenon of withdrawal of investment and failed investment proposals in India:

· Some commentators put forward the reason for departure of a large number of foreign investors as bad governance. Interference from the government should be reduced. Very good examples are software and automobile sectors where interference from the government is minimum and so departure is also less.

· In this context it was suggested that the report could look at failed investment proposals e.g. World Tel headed by Sam Pitroda was unsuccessful in its venture with Reliance in the telecom sector. Analysis could be done to find out the reasons. One reason could be the high level of corruption.

· However some commentators pointed out that a few of the companies might exit from investment ventures, which is just a process of the rationalisation of global investment.

There were some opinions on the role and characteristics of FDI:

· We should not see FDI as the only tool for poverty alleviation and generating employment in India.

· FDI inflows take place even in economies where market imperfections exist. Thus FDI inflows may not rise even after improving administrative procedures.

FDI policy context in India

A session was dedicated to this issue. The presentations by some eminent speakers and experts in the field of investment policies highlighted the following points:

The need for appropriate policies to facilitate the flow of FDI was discussed. The speakers pointed out that:

· We must discuss methods of implementing FDI policies rather than the formulation and details of FDI policies.

· India must have a strong domestic Competition Policy and a radical improvement in domestic governance.

· Power is a State subject while telecom is a concurrent subject i.e. under the jurisdiction of both the Centre and the States according to the Indian constitution. Some of the State Governments have different policies than the Central Government, which explains why reforms did not have the same effect on the two: telecom reforms have been successful but power sector reforms are in a mess. Some constitutional changes can be made to correct this.

The speakers highlighted certain prerequisites for attracting and retaining FDI:

· Appropriate and strong institutions must be developed. A major problem faced in India is that at the micro level, expertise is lacking on matters of FDI i.e. what are the policies, how to regulate and retain FDI.

· A Good and healthy infrastructure sector, macroeconomic stability (stable exchange rates, stable rates of interest etc.) and commitment of the State to social development are needed to attract steady and beneficial foreign investment.

· Management control of companies is important from the point of view of investors. Investors want full management control in companies. 51% control of companies by the foreign investors should be allowed in India to attract FDI.

· A Proper database must be developed for effective analysis of FDI inflows. In India data is lacking on the operations of the companies which are coming in i.e. the sectoral break-up of foreign investment, break-up in terms of M&As and greenfield, locational break-up of FDI etc.

The utility and characteristics of FDI in the context of globalisation was discussed by the speakers:

· It was cautioned that globalisation may not benefit everybody around the globe due to cultural, political and social factors; for the same reasons it affects the poor and the disadvantaged more adversely than others.

· It was pointed out that we must think about FDI in a global context. For example what is the effect of FDI in the African continent and whether the vast majority of people are benefiting or not.

· In this context it was said that developing countries should encourage foreign investment in small volumes, which energise the domestic industries but do not harm them. We should encourage Foreign Institutional Investors (FIIs) as they bring in capital to fight Transnational Corporations (TNCs) rather than FDI, which brings in the TNCs.

· FDI affects domestic capital adversely because the rate of return on domestic capital falls when FDI flows in. So as foreign investment rises, domestic investment falls.

· There was an opinion that FDI is not beneficial for developing countries in the long run. In the short run FDI is needed to provide a spurt in the growth rate. Analysis shows that developing countries that received a high level of FDI in the recent past are now worse off due to repatriation of profits and outflow of capital. Initially when FDI flows into the country, governments are able to sustain high borrowing but FDI flows fall in the long run leaving the developing countries in a debt crisis like Argentina is facing at present.

· In response to the point raised above it was said that foreign investment should not be seen differently from domestic investment: they are two sides of the same coin. High rates of investment are badly needed in India. An important factor to recognise is that investment in appropriate sectors will lead to faster and sustainable development.

An open house discussion followed the presentations by the speakers. The highlights of the discussions on different issues are given below.

Regarding effects of FDI the following points were raised:

· The level of FDI inflow is too low in India to have any significant beneficial or harmful impact, so the focus should be more on how to increase domestic investment. However it was also pointed out that huge capital in the power sector is required which domestic investors are unable to provide. Therefore FDI is needed to relieve capital constraints in some crucial priority sectors.

· In this context examples of two broad categories of countries were given, which received high levels of FDI in the recent past: those belonging to South East Asia and to Latin America. The first group of countries experienced high FDI coupled with lower income inequality whereas in the latter group high FDI was combined with increasing income inequality. One of the reasons is that the Latin American countries did not give emphasis to education. Country comparisons should be done carefully when analysing the effects of FDI.

· Often FDI is resisted because of the fear of capital flight. It was pointed out that FDI from certain sectors could not be withdrawn overnight so the fear is not fully justified, e.g. FDI from the power sector cannot fly away rapidly.

· FDI and technology flows: India has had little time to assimilate the technology that has flown in with FDI; within four to five years India has had to absorb a range of new technology which has been very difficult. As a result, technology that has flown in is outdated, therefore we should not blame only FDI for it.

On the need for attracting FDI it was said that

· FDI is needed by developing countries because of bad governance, which forces developing countries to rely on FDI for relieving the domestic capital constraint. Good governance would enable the governments of developing countries to mange their debt effectively and efficiently and help them to overcome capital crunch problems.

· In the context of encouraging FIIs over FDI, it was opined that the fact the FIIs are coming to India reflects their expectations of good performance by the Indian companies.

· In the same context another speaker pointed out that we have to recognise that portfolio investment is not nationalistic vis-à-vis FDI so we must be less emotional and more careful before coming to a decision on merits and demerits of different types of FDI.

The participants discussed the issue of FDI and employment generation. The following points were raised:

· FDI is still not allowed in India in the textile sector, which has a high relative importance in the economy; to increase employment this sector thus must be looked at.

· In this context it was said that to increase employment India should concentrate on her Small Scale Sector; weaving and soap making should be banned in the organised sector and be produced in the Small Scale Sector. This would lead to higher employment as this sector has a high employment elasticity.

On the issue of the handling of reforms by the Central and the State governments in India the following point was raised:

· In many of the states in India reforms were better handled than by the Central government so it is not true that reforms would not work in a sector which falls under the jurisdiction of the States.

Investment in the WTO context

The highlights of the presentations by the speakers are:

· The general opinion among the speakers was that there is no problem with the WTO regime but many had reservations regarding an agreement on investment at the WTO.

· However it was pointed out that the developed countries should not be allowed to push their agenda through an IIA.

· It was also said that India has done well on the issues of commodity trade at the WTO, but lacks clear policy or direction on issues of investment.

· One of the reasons for this state of affairs could be that the number of studies conducted in India on WTO issues are not many and so there is a dearth of proper analyses on different clauses of WTO agreements and their implications for India.

· The developing countries must realise that the WTO has to be understood properly and in the era of globalisation they have to welcome FDI and thus understand the investment issues properly and comprehensively.

The discussion that followed the presentations was centred on the history of and need for an IIA at the WTO. The following points were raised:

· The Organisation of Economic Co-operation and Development (OECD) introduced a Multilateral Agreement on Investment (MAI) to deal with the expropriation issues. In the current context an IIA has to be discussed and debated upon keeping changing international relations in mind.

· On the other hand at the WTO an IIA was proposed by the European Union (EU) due to political considerations rather than as an economic requirement.

· In the context of the OECD-MAI several countries including the EU had reservations on different issues and if a few developed countries could not reach an agreement then it would be even more difficult to reach an agreement involving many more countries with lot more heterogeneity.

· It was opined that the developing countries should demand an agreement on the Movement of Natural Persons too if they have to sign an IIA.

· Some scepticism was expressed as to why an IIA at the WTO would facilitate higher FDI inflows.

· However, it was also pointed out that some countries, including developing ones have already signed many bilateral investment treaties with the provisions that are being discussed in the WTO context, but the same countries are opposing it at that level.

· The major objection is with the proposed provision of pre-established rights, which many developing countries including India are not willing to accept.

Conclusion

The NRG meeting for the IFD project ended with a set of recommendations that were generated from the discussions and debate. This set of recommendations would be circulated among the NRG members and stakeholders to spread awareness and build opinion on crucial domestic and international investment issues.

Recommendations

Promotion of a good investment policy

· Enhance domestic environment for attracting as well as absorbing investments, foreign as well as domestic – good governance, emphasis on infrastructure, macroeconomic stability and commitment of the state to social development.

· Establish an institutional base for attracting and regulating investments

· Enhance micro level expertise such as drafting good investment contracts

· In order to regulate FDI, take into consideration its long term impact along with its short-term gains.

· Develop a strong competition policy

Information dissemination

· Raise awareness and stimulate national debate on investment issues

· Build capacity of civil society on investment issues

The project also received some clues regarding which direction it should take in the future. The main focus of the project is to examine investment policy regime and actual investment performance in developing countries while closely scrutinising FDI policy and performances. However domestic issues cannot be ignored. The concerns and fears of different stakeholder groups e.g. consumers, workers, investors and policy makers have to be addressed. Apart from domestic issues, crucial international issues, which affect investment environment in developing countries, will be discussed in the project. The project will also look at WTO issues, address the concerns of developing countries regarding the WTO agenda, discuss the strategies that could be adopted by them and argue the merits or demerits of an IIA at the WTO.

CONTACT US

CUTS Centre For International Trade, Economics & Environment (CITEE)

D–217, Bhaskar Marg, Bani Park,

Jaipur 302 016, India,

Ph: 91.141.2282821

Fax: 91.141.2282485

Email: cuts@cuts.org /ifd_cuts@rediffmail.com

About Project

Event Reports

Papers and PowerPoint Presentations

Country-Reports

Publications

CUTS Home

Hosted by: www.fullestop.com

Top