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CHAPTER IV
DYNAMICS OF POLICY FRAMEWORK CONCERNING
MULTINATIONAL CORPORATIONS IN INDIA
The existence of Multinational Corporations (MNCs) in India is not a recent phenomenon
(Beena et al., 2004; and Belhoste and Grasset, 2008) rather these MNCs marked their
presence in global economy about three centuries ago itself. As far as Indian position is
concerned, 3,799 foreign companies were found to be registered in India by the end of
December, 2012 (Annual Report 2012-13, Ministry of Corporate Affairs, GOI).
Foreign Direct Investment (FDI) is an important constituent of every nation’s efforts
toward its economic development as well as a vital part of the globalization of the world
economy (Festervand, 1999). The historical background of MNCs here can be traced
back to early 1600s, whereby the British rulers entered India through their MNC known
as East India Company during the colonial era. However, except East India Company,
due to lack of clear evidences, it is not possible to draw an exact boundary line in regard
to entry of FDI by these multinational companies in India. Moreover, such outlining
becomes difficult because of the discontinuous nature of the historical data relating to
these MNCs. Except for a limited time period of the pre and post independence era such
as 1948-61, 1961-78 and 1991 onwards, the existing sources of literature are not
sufficient to document the complete history of multinational corporations and FDI in
India. Furthermore, authenticity of data can also not be ensured as data presented with
regard to such FDI by one source do not match with that of another source (Nayak,
2006).
For understanding the historical background of MNCs in India, a division has been made
by discussing the same under two heads namely, pre- independence and post
independence phase.
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4.1 PRE-INDEPENDENCE PHASE
As per Nayak (2006), the period ranging from 1900s-1918 (called as the first phase of pre
independence FDI in India), there were no restrictions on the nature as well as type of
FDI pouring into India. It can be enunciated that majority of these investments were
exploitative in nature and were just concentrating in the sectors such as mining and
extractive industries to suit the general economic interest of Britishers. It is a noticeable
fact that even in the post independence era, a major pie of the FDI source of India
continued to come from the same source. An interesting point is that despite of favorable
environment for free flow of FDI, no other country had shown interest for investing in
India than U.K. and all the foreign direct investments coming to India during that period
were sourced through the Managing Agents from U.K (Beena et al., 2004).
The period from 1919-1947 was the period when the FDI actually originated in India.
This phase can be called as second phase in pre-independence FDI history in India.
Introduction of import duties during this period ‘stimulated’ various British companies to
invest in the manufacturing sector in order to protect their businesses in India. Though
some Japanese companies also enhanced their trade share with India, yet U.K. maintained
its position as most dominant investor in India during this period too.
Though a deep analysis of literature points out that as a characteristic of colonial heritage,
foreign investments in India during this period were concentrated in extractive industries
only; for example, 85 per cent of the tea plantations were foreign-owned. Another area of
concentration of foreign investments during pre-independence period was international
trade and ancillary services.
Another characteristics of foreign capital found in India during this period was their size,
i.e. these foreign companies were the largest and most influential companies in any
industry that they participated in. Kidron (1965) concluded that the average foreign-
owned cotton mill employed 3,300 workers as compared to 1,800 by an Indian-owned
mill. Furthermore, these companies were also handling 39 per cent of India's imports and
between 37 and 44 per cent of India's exports (Bagchi, 1972).
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4.2 POST INDEPENDENCE ERA
Before independence, Indian government was quite comfortable with the “Laissez-
Faire” policy adopted by the earlier British government; therefore, India was not having
any foreign policy of its own. However, after independence, various issues related to
import of foreign capital and its accompanying expertise got attention of the then policy
makers. Therefore, during the post independence era, the Government of India allowed
the operations of the Multinational Corporations on such terms suiting national interest.
A brief examination of the Indian policy framework from a historical perspective carried
out in following analysis will also bring out the role of economic and political exigencies
before the governments at those times. For the first four decades of post independence
era, “self reliance” was viewed as the key objective of the economic policy for every
sector of the economy (Mathur, 2002). This objective was meant to be achieved through
the means such as planning, control and regulation thereby also having its impact on
foreign investment policy (Beena et al., 2004, Sivadasan, 2004).
Along with, policies relating to foreign capital were also affected by some other ancillary
social and political objectives such as redistribution of income and wealth, creation of
employment opportunities, grant of protection and assistance in the development of
small-scale industries and protection of the consumers against private sector monopolies.
Moreover, on the lines of other socialist regimes such as the Soviet Union, policy makers
apparently decided to follow the approach of a “planned economy”. This approach in
turn had its affect on the policy concerning FDI (Sivadasan, 2004), the evidence of which
can be traced from the first policy towards MNCs and FDI announced by the then Prime
Minister Jawaharlal Nehru in April 1949. This policy recognized that foreign private
capital would promote national goals in the overall framework of planned development
with the following two objectives:
(i) to treat foreign direct investment as a medium to acquire modern advanced
technology; and
(ii) to mobilize resources, especially in terms of foreign exchange.
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With the changing times, the policy of the Indian governments never remained similar
towards the foreign capital but underwent changes in the post independent era (Kumar,
1998). Accordingly, it can be split into four phases. During the first phase of 1960s, these
policies were quite liberal, which turned into stringent in the second phase of 1970s.
However, these were again liberalized in 1980s which is characterized as the third phase
while real liberalization happened in last phase of 1990s. Moreover, the policy
environment during the first phase was characterized by discretionary control and lack of
transparency (Kumar, 1994). These main four phases of the Indian policy framework
concerning MNCs is discussed as under:
4.2.1 Phase I - 1948 - 1966: The Period of “Cautious Welcome Policy”
The first and unique foreign policy of India to deal with incoming foreign direct
investment was pronounced by prime minister Pandit Jawaharlal Nehru at the very dawn
of independence as on 6th April 1949 (Mathur, 1992). Despite of many critics of his
world view, a wide national consensus emerged for his ideas on independent foreign
policy of independent India (Mohan, 2006). Nehru recognized that suspicious attitude
towards foreign capital had to be given up due to the urgent need for accelerated
industrialization and growth. Therefore, the government had to transform its rigid outlook
towards foreign capital. It resulted into Nehru’s statement in parliament that foreign
investment was considered “necessary”, not only to supplement domestic capital but also
to secure scientific, technical and industrial knowledge and capital equipment (Kidron,
1965). Though highly protectionist towards foreign capital, yet the industrial policy
statement of April, 1949 had to relax its restrictions in the form of following promises on
mutually advantageous terms that attracted few multinational corporations to invest in
India:
All undertakings, whether Indian or foreign will have to conform with the general
requirements of the government’s overall industrial policy;
No discrimination will be made by Indian policy makers between the foreign and
the domestic undertakings;
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As far as remittances of profits and repatriation of capital was concerned,
reasonable facilities would be granted to foreign investors as permitted by foreign
exchange position at prevailing time; and
In case a particular industry has to be nationalized; a fair and equitable
compensation would be granted to the foreign investors having a stake in that
undertaking.
By rule, major interest, ownership and effective control of the undertaking will
remain in Indian hands (Indian Investment Centre, 1985).
When industrialization in India was carried out to a satisfactory extent, a new industrial
policy resolution of April 1956 was adopted. This resolution provided for the list of
industries that were made a part of India’s public sector operation without discriminating
between private-domestic and foreign investors. Therefore, foreign capital in India started
venturing through technical collaboration during this period. However, in the year 1957,
foreign exchange crisis and financial resource mobilization crisis for the second five-year
plan (1956-61) led to further liberalization in the government’s attitude towards foreign
investment in the following two ways
(i) A more frequent equity participation was allowed to foreign enterprises; and
(ii) In lieu of royalties and fees, equity capital was accepted in technical collaborations.
Further, a number of tax concessions were granted to foreign enterprises. The licensing
procedure was also simplified to avoid any delays. In addition, double taxation avoidance
agreements were entered into with certain countries such as Finland, France, U.S.A.,
Pakistan, Ceylon, Sweden, Norway, Denmark, Japan and West Germany etc. The Agency
for International Development (AID) investment guarantee was also extended to cover
US private investment in India (Kumar,1998; Chopra,2003). This led to ‘ambitious’
investments by many companies from countries such as U.K. and USA (Nayak, 2006).
Keeping in mind the continued foreign exchange trouble for financing those projects that
were on the completion path during the previous five–year plan, the Government of India
further de-reserved certain industries earlier reserved for public sector for foreign
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investment in the year 1961. These were industries such as drugs, aluminum, heavy
electrical equipment, fertilizers, synthetic rubber etc (Mathur, 1992; Kumar, 1998;
Chopra, 2003). However, it was mentioned that the proportion of foreign equity would
depend upon the degree of sophistication of technology and the volume of foreign
exchange required at that time. In addition, services of IDBI were also made available for
rupee finance required by these undertakings.
Further, the Finance Act, 1965 also made provision for certain additional tax concessions.
In 1966, wherein the investments by NRIs were allowed without any limit in public
limited industrial concerns in India and for private sectors, this limit was kept up to 49
per cent for private sector.
4.2.2 Phase II- 1967-1979: The Period of “Selective and Restrictive Policy”
The first phase of liberal attitude for foreign direct investment continued till the end of
mid sixties. However, a significant outflow of foreign exchange in the form of
remittances of dividends, profits, royalties and technical fees raised an alarm for the
government. To meet any crisis resulting from foreign economic domination in future,
the government of India rationalized the procedure of inviting foreign collaborations and
their approvals. Therefore, from 1972-73 onwards, the policy of government became
highly selective and restrictive as far as foreign exchange, type of FDI and ownership of
foreign companies in India were concerned.
The government also decided to set up a new agency called Foreign Investment Board
(FIB) in 1968 to deal with all cases involving FDI or collaborations except those in
which total investment in the share capital exceeded 40 per cent. All other cases where
foreign firms held more than 40 per cent equity and Rs. 20 million share capital were
required to be approved by the Cabinet Committee.
A clear cut demarcation was also made by government by classifying all industries in
three parts. The first list covered those industries where no collaboration was considered
necessary. The second list included industries wherein only technical collaboration was
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allowed. The third list dealt with industries wherein foreign investment could be invited
(GoI, 1968). For industries falling in second and third list, permissible range of royalty
payments was kept to be not more than 5 per cent. Moreover, the permissible time
duration for such collaborations was also reduced from 10 to 5 years. In addition,
restrictions on the renewal of agreements were also imposed.
Further in 1973, a group of core industries was specified wherein activities of MNCs and
large industrial houses were sought to be restricted (Mathur, 1989). In 1973, a new
Foreign Exchange Regulation Act, 1973 (popularly known as FERA) came into effect.
FERA was introduced as a cornerstone of Indian regulatory framework to tighten the
scope of FDI regime in India. Its aim was to conserve foreign exchange reserves of the
country in the interest of economic development (FERA, 1973). With the operation of
FERA, all existing companies came under direct control of Reserve Bank of India (RBI).
FERA imposed a general ceiling of 40 per cent on the foreign equity participation in the
country. However, companies working under the core of public sector, tea plantations
and those engaged in manufacturing and employing sophisticated technology or
predominantly producing for exports were allowed to retain 51 per cent to 74 per cent of
foreign equity. As a result, a large number of MNCs diluted their shares to avoid
stipulations posed by FERA and enjoy the benefits of Indianization (Mathur, 2001).
Nearly eighty foreign companies to divested from India during this period (Nayak, 2008).
Further, in 1976, a committee called Technical Evaluation Committee (TEC) was
formed with an objective to assist FIB for screening foreign collaboration proposals and
thereby discussing these with the representatives of various scientific agencies such as
the Council of Scientific and Industrial Research (CSIR) and the Department of
Science and Technology (DST). Moreover, guidelines were also specified for assigning
a primary role to Indian consultants wherever foreign consultants were engaged.
4.2.3 Phase III- 1980-1990: The Period of “Partial Liberalization”
The third phase (1980-1990) can be seen as a new facet in the history of FDI in India.
The overall policy framework for FDI during eighties (especially in 1984-85) became
more liberal. Two main causes were noticed behind such a shift in the policy i.e. second
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oil crisis and failure of India to give a boost to its manufactured exports. This policy
exempted investment proposals received from oil exporting countries accompanied with
technology transfer. However, for 22 industries where indigenous technology was
sufficiently developed, such ban on financial and technical collaborations was maintained
by the government. The main highlights of policy of government of India during this
period were:
Firstly, liberalization of imports of capital goods and technology in order to stress
on promotion of the modernization of the plants and equipments;
Second, gradual reduction in import restrictions and tariffs in order to expose the
Indian economy to competition; and
Thirdly, to assign an important role to multinational corporations for promotion of
export of manufactured goods on a big scale.
In order to facilitate such investments The Reserve Bank of India also simplified
procedural formalities relating to exchange control. The industrial policy statements
issued in 1980 and 1982 pronounced liberalization of licensing rules and regulations.
Along with, a host of incentives and exemptions from foreign equity restrictions to 100
per cent export oriented units were also allowed under FERA. This resulted into
delicensing of 25 industries. Further, the list of items under Open General License
(OGL) was also expanded in order to implement the policies during the early eighties
allowing for the gradual liberalization of imports of raw materials and capital goods. As
a result, nearly 150 items in 1984 and 200 capital goods in 1985 came under OGL.
Moreover, import duties on different type of capital goods were slashed down in 1985.
Furthermore, restrictions on imports and drawings were also removed. In 1980, the
powers were delegated to the administrative ministries to approve foreign
collaborations not having any foreign equity participation and having an outflow of up
to Rs. 50 lakhs in foreign exchange. This outflow limit was further raised to Rs. 1 Crore
in January 1987.
The tax rates on royalties were also slashed from 40 to 30 per cent in 1986. To further
smoothen the progress of the inflow of high technology to existing industry, the
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Cabinet Committee on Economic Affairs (1986) decided to permit the foreign equity
participation even in existing Indian companies employing high technology. The scope
of the technical development fund was also widened to include import of all kinds of
capital equipments, technical know-how and assistance, drawings and design and
consultancy services. The ceiling of this fund was raised to a foreign exchange up to
Rs. 20 million per year. Along with, multiple import applications within a year were
also permitted.
Substantial procedural liberalization in areas such as industrial licensing, procedures for
collaborations, appointment of directors, technicians, visa requirements, custom
procedures, repatriation of funds etc. were also carried out. Investments and
collaborations were also permitted on a selective basis even in the non-manufacturing
and existing companies. New foreign investments in the existing companies were
allowed if the same was justified on grounds of technology exports. Hence, this process
of industrial policy reforms aimed at fostering greater competition, efficiency and
growth in the industry through a stable, pragmatic and non-discriminatory policy for
foreign direct investment. Although, the amount of FDI augmented by over 13 times
during this period, foreign companies invested ‘cautiously’ during this period with an
attitude of wait and watch (Nayak, 2008).
4.2.4 Phase IV- 1991-2001: The Period of “Liberalization and Open Door Policy”
In the early nineties, the balance of payments problem of India had turned quite severe.
Along with, a rapid increase in India's external debt and increasing political uncertainty
made international credit rating agencies to lower both short and long term borrowing
rating of India. This resulted into tough borrowing position in international commercial
markets and outflow of foreign currency deposits by NRI from India. Further, Gulf war
made this situation rather worse and this led to rise in petroleum prices. These
developments made borrowing from IMF inevitable under a standby arrangement.
In addition, since manufacturers were extremely dependent on domestic growth,
therefore there was a dire need to adopt a more outward looking policy for India.
Therefore, at the behest of IMF and World Bank, the new government headed by Mr.
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P.V. Narasimha Rao initiated a programme of macro-economic stabilization and also a
structural adjustment programme. This resulted into liberalization of Economic policies
in order to encourage investment and accelerate economic growth (Beena et al., 2004).
This programme resulted into devaluation of Indian Rupee and announcement of a New
Industrial Policy (NIP).
In spite of these developments, the ideology of Pandit Nehru has also been a challenge
for the Indian leaders to suit the new political environment. The Indian policy makers
could neither denounce Nehru nor formally reject Nehru’s ideas for avoidance of any
kind of serious political troubles. Yet the challenge was to continually cobble together
and refashion India’s foreign policy to suit the new requirements (Mohan, 2009).
The scenario relating to foreign direct investment in India could also not remain
unaltered by these upcoming national developments. In order to stabilize India’s
external sector and to review the declining credit rating of the country, the government
gave a second thought to the foreign investment policy of India. The New industrial
policy and subsequent policy amendments liberalized the industrial policy regime in the
country relating to FDI. For example, the new industrial policy of 1991 abolished the
industrial approval system in all industries except for 18 strategic or environmentally
sensitive industries. Similarly, in 34 high priority industries, FDI was allowed to be
automatically approved after accomplishing certain norms up to 51 per cent.
Furthermore, technology transfer agreements were not required to be essential part of
FDI proposals. Foreign equities up to 51 per cent were allowed for trading companies
primarily engaged in export activities. In order to attract MNCs in energy sector, 100
per cent foreign equity was permitted in the power generation.
Furthermore, multinational companies were also allowed to explore non-associated
natural gas and development of gas fields including laying down pipelines and setting
up Liquefied Petroleum Gas (LPG) projects. A new package was also announced for
100 per cent export-oriented projects and companies. Foreign Investment Promotion
Board (FIPB) was authorized to provide a single window clearance system in the Prime
Minister's office in order to invite and facilitate MNC investment in India.
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For the purpose of expansion in the priority industries, the existing companies were also
allowed to raise their foreign equity levels up to 51 per cent. The use of foreign brand
names for products manufactured in domestic industry (which was earlier restricted) was
also liberalized. India became a signatory to the Convention of the Multilateral
Investment Guarantee Agency (MIGA) for protection of foreign investments.
The Foreign Exchange Regulation Act (FERA), 1973 was revised and earlier restrictions
placed on MNCs in FERA were lifted. As a result, the companies having more than 40
per cent of foreign equity were treated on par with fully Indian-owned companies. New
sectors such as mining, banking, telecommunications, highways construction and
management were thrown open to private as well as foreign owned companies.
These relaxations and policy reforms were accompanied by active courting of foreign
investors at the highest levels. The international trade policy regime was also
considerably liberalized with lower tariffs on various importable goods and negative list
for imports was sharp pruned. The Rupee was also made convertible first on trade
account and finally on current account too. As a result of these changes, the MNCs
from across the globe can enter into India in modes discussed hereunder:
4.2.4.1 Entry Options for Foreign Multinational Companies
A foreign multinational corporation planning to set up its business operations in India
were allowed to enter through the following modes:
As an Incorporated Entity: to become an incorporated entity, Companies Act,
1956 allowed a MNC to operate through:
i. Joint ventures; or
ii. A Wholly Owned Subsidiaries.
Depending on the requirements of the investor and subject to any equity caps
prescribed in respect of the area of activities under the Foreign Direct
Investment (FDI) policy, foreign equity in such companies can be up to 100 per
cent of the total equity.
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As an Unincorporated Entity: alternatively, any foreign multinational
company can enter into business operations in India by opening a:
i. Liaison Office/Representative Office;
ii. Project Office; or
iii. Branch Office.
Such offices of multinational corporations were allowed to undertake activities
permitted under the Foreign Exchange Management Act, 2000.
4.3.4.2 Policy Guidelines for Foreign Investment in India
The new policy guidelines introduced during the post reform era for the foreign
investors include the following:
a) Automatic approval – by the Reserve Bank of India; or
b) Through the Foreign Investment Promotion Board (FIPB).
Automatic approval of Reserve Bank of India was allowed if the FDI in the equity of
corporation does not exceed:
50 per cent in the industries given in annexure III A of the new industrial policy;
51 per cent in the industries given in annexure III B of the new industrial policy;
74 per cent in the industries given in annexure III C of the new industrial policy;
and
100 per cent in the industries given in annexure III D of the new industrial
policy.
In the above cases, the intending company was required only to report to Reserve Bank of
India within 30 days of the receipt of foreign equity/ allotment of the shares. For
proposals failing to qualify automatic approval criteria, approval of FIPB was required
(Reserve Bank of India, Department of Industrial Policy & Promotion, IBEF, 2008). The
sector wise detail of the permitted foreign equity limit is presented in table 4.1:
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TABLE 4.1
GUIDELINES FOR THE ENTRY OF FDI IN VARIOUS SECTORS/ ACTIVITIES
SR.
NO.
SECTOR %age OF FDI CAP/
EQUITY
ENTRY ROUTE
1. AGRICULTURE
1 a) Agriculture & Animal Husbandry
a) Floriculture, Horticulture, and Cultivation of Vegetables & Mushrooms under controlled Conditions
b) Development and production of Seeds and planting material;
c) Animal Husbandry (including of /breeding of dogs), Pisciculture, Aquaculture under controlled conditions; and
d) services related to agro and allied sectors
Note: Besides the above, FDI was
not allowed in any other
agricultural sector/activity
100 Automatic
1 b) Tea Plantation
Tea sector including tea plantations
100 Government
2. INDUSTRY
2 a) MINING
2 aa) Metal ores
Mining and Exploration of metal and non-metal ores including diamond, gold, silver and precious ores but excluding titanium bearing minerals and its ores;
100 Automatic
2 ab) Coal and Lignite 100 Automatic
3. MANUFACTURING
3 a) Manufacture of items reserved for production in Micro and Small Enterprises (MSEs)
Subject to the sectoral caps, entry routes and other relevant sectoral regulations.
4. DEFENCE
4 a) Defense Industry subject to Industrial license under the Industries (Development & Regulation) Act 1951
26 Government
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5. POWER
5 a) Electric Generation, Transmission, Distribution and Trading
5 aa) i) Generation and transmission of electric energy produced in-hydro electric, coal/lignite based thermal, oil based thermal and gas based thermal power plants.
ii) Non-Conventional Energy Generation and Distribution.
iii) Distribution of electric energy to households, industrial, commercial and other users and
iv) Power Trading
100 Automatic
6. SERVICES SECTOR
6 a)
Civil Aviation Sector
The Civil Aviation sector includes Airports, Scheduled and Non-Scheduled domestic passenger airlines, Helicopter services / Seaplane services, Ground Handling Services, Maintenance and
Repair organizations; Flying training institutes; and Technical training institutions.
6 aa) Airports
(a) Greenfield projects 100 Automatic
(b) Existing projects
100 Automatic up to 74 Government route
beyond 74
6 ab)
Air Transport Services
(1) Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline
49% FDI (100 for NRIs)
Automatic
(2) Non-Scheduled Air Transport Service
74% FDI (100 % for NRIs)
Automatic up to 49 Government route beyond 49 and up to 74
(3) Helicopter services/seaplane services requiring DGCA approval
100
Automatic
6 ac)
Other Services under Civil Aviation Sector
(1) Ground Handling Services subject
to sectoral regulations and security clearance
74 % FDI (100 % for NRIs)
Automatic up to 49 Government route beyond 49 and up to 74
(2) Maintenance and Repair organizations; flying training institutes; and technical training
100 Automatic
97
institutions
7. Asset Reconstruction Companies 74% of paid-up capital of ARC
Government
8. Banking
8a) Banking –Private Sector
74 % including investment by FIIs
Automatic up to 49 Government route beyond 49 and up to 74
8 b)
Banking- Public Sector
Banking- Public Sector subject to
Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80. This ceiling (20) is also applicable to the State Bank of India and its associate Banks.
20% (FDI and Portfolio Investment)
Government
9. BROADCASTING
9 a) Terrestrial Broadcasting FM (FM
Radio) subject to such terms and conditions as specified from time to time by Ministry of Information and Broadcasting for grant of permission for setting up of FM Radio Stations
20% (FDI, NRI & PIO investments and portfolio investment)
Government
9 b) Cable Network subject to Cable Television Network Rules, 1994 and other conditions as specified from time to time by Ministry of Information and Broadcasting
49% (FDI, NRI & PIO investments and portfolio investment)
Government
9 c) Direct –to-Home subject to such guidelines/terms and conditions as specified from time to time by Ministry of Information and Broadcasting
49% (FDI, NRI & PIO investments and portfolio investment) Within this limit, FDI component not to exceed 20%
Government
9 d) Headend-in-the-Sky (HITS)
Broadcasting Service refers to the multichannel downlinking and distribution of television programme in C Band or Ku Band
74% (Total direct and indirect foreign investment including portfolio and FDI)
Automatic up to 49% Government route beyond 49% and up to 74%
9 e) Setting up hardware facilities such as up-linking, HUB etc.
(1) Setting up of Up-linking HUB/Teleports
49% (FDI & FII)
Government
(2) Up-linking a Non-News & 100% Government
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Current Affairs TV Channel
(3) Up-linking a News & Current Affairs TV Channel subject to the condition that the portfolio investment from FII/ NRI shall not be “persons acting in concert” with FDI investors, as defined in the SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 1997
26% (FDI & FII)
Government
10 COMMODITY EXCHANGE 49% (FDI & FII)
Government
11. DEVELOPMENT OF TOWNSHIPS,
HOUSING, BUILT-UP INFRASTRUCTURE AND CONSTRUCTION-DEVELOPMENT
PROJECTS
Townships, housing, built-up infrastructure and construction development projects
(which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure)
100 Automatic
12. CREDIT INFORMATION
COMPANIES (CIC)
49% (FDI & FII)
Government
13. INDUSTRIAL PARKS - BOTH
SETTING UP AND ALREADY
ESTABLISHED INDUSTRIAL
PARKS
100 Automatic
14. INSURANCE
26% Automatic
15. INFRASTRUCTURE
Companies in Securities Markets namely, Stock exchanges, Depositories and Clearing Corporations, in compliance with SEBI Regulations
49% (FDI & FII) [FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital ]
Government
99
16. NON-BANKING FINANCE COMPANIES (NBFC)
Foreign investment in NBFC is
allowed under the automatic route in only the following activities:
(i) Merchant Banking
(ii) Under Writing
(iii) Portfolio Management Services
(iv) Investment Advisory Services
(v) Financial Consultancy
(vi) Stock Broking
(vii) Asset Management
(viii) Venture Capital
(ix) Custodian Services
(x) Factoring
(xi) Credit Rating Agencies
(xii) Leasing & Finance
(xiii) Housing Finance
(xiv) Forex Broking
(xv) Credit Card Business
(xvi) Money Changing Business
(xvii) Micro Credit
(xviii) Rural Credit
100 Automatic
17. PETROLEUM & NATURAL GAS SECTOR
Exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products and natural gas, marketing of natural gas and petroleum products, petroleum product pipelines, natural gas/pipelines, LNG Re-gasification infrastructure, market study and formulation and Petroleum refining in the private sector, subject to the existing sectoral policy and regulatory framework
100 Automatic
Petroleum refining by the Public Sector Undertakings (PSU), without any disinvestment or dilution of domestic equity in the existing PSUs.
49 Government
100
18. PRINT MEDIA
Publishing of Newspaper and periodicals dealing with news and current affairs
26% (FDI and
investment by NRIs/PIOs/FII)
Government
Publication of Indian editions of foreign magazines dealing with news and current affairs
26% (FDI and
investment by NRIs/PIOs/FII)
Government
Publishing/printing of Scientific and Technical Magazines/ specialty journals/ periodicals, subject to compliance with the legal framework as applicable and guidelines issued in this regard from time to time by Ministry of Information and Broadcasting.
100
Government
Publication of facsimile edition of foreign newspapers
100 Government
19. SATELLITES – ESTABLISHMENT AND OPERATION
Satellites – Establishment and operation, subject to the sectoral guidelines of Department of Space/ISRO
74% Government
20. TELECOMMUNICATION
(i) Telecom services
74
Automatic up to 49% Government route beyond 49% and up to 74%
(a) ISP with gateways
(b) ISP’s not providing gateways i.e without gate-ways (both for satellite and marine cables)
(c) Radio paging
(d) End-to-End bandwidth
74
Automatic up to 49% Government route beyond 49% and up
to 74%
(a) Infrastructure provider providing dark fibre, right of way, duct space, tower (IP Category I)
(b)Electronic Mail
(c) Voice Mail
100
Automatic up to 49% Government route beyond 49% and up
to 74%
101
21. TRADING
Cash & Carry Wholesale
Trading/ Wholesale Trading
(including sourcing from MSEs)
100 Automatic
E-commerce Activities
Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading
100 Automatic
Test Marketing
of such items for which a company has approval for manufacture, provided such test marketing facility will be for a period of two years,
100 Government
Test Marketing
of such items for which a company has approval for manufacture, provided such test marketing facility will be for a period of two years,
51 Government
Single Brand Retail Trading 100 Government
Multi Brand Product Retail
Trading 51 Government
22. COURIER SERVICES
For carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898.
100 Government
23. PHARMACEUTICALS
23a. Greenfield 100 Automatic
23b. Brownfield 100 Government
24. POWER EXCHANGES
Registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010
49% (FDI & FII)
Government (for FDI)
Source: Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of
India in ‘Consolidated FDI Policy-Effective from April 5, 2013’
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4.3 LEGAL POLICY FRAMEWORK GOVERNING FOREIGN
CAPITAL IN INDIA SINCE INDEPENDENCE
The policy framework in India has almost been same for Indian as well as foreign
private investment. As the motive to regulate foreign direct investment was to ensure
majority control to remain in Indian hands to the maximum extent, therefore, several
legal rules and regulations were implemented from time to time to discourage foreign
ownership in most industries for many years.
Starting from Industrial Policy Regulation, 1948, this framework further included
Industrial (Development and Regulation) Act, 1951 (IDRA), the features of which
had their roots lying in the Second World War period. Similarly, Monopolies and
Restrictive Trade Practices Act, 1969 (MRTPA) was adopted to fulfill the objectives
of the Directive Principles of State Policy as enshrined in the Constitution of India.
Furthermore, to give a boost to the principle of self-reliance, conservation of the
limited foreign exchange reserves, rational utilization of the same and to curb external
liabilities for the coming generations, the Foreign Exchange Regulation Act (FERA)
was also adopted in 1973.
All these acts produced an array of rules and administrative norms that in turn led to
creation of a wide and complex system of controls and procedures involving
extensive delays and uncertainties in new investments. The key policy measures
adopted over the years are summarized in the Table 4.2
The analysis given in Table 4.2 examined the policy framework of the respective
Indian governments towards FDI and MNCs in India during both pre as well as post -
Independence period. In nutshell, the policy framework of FDI and multinationals in
India during the twentieth century can be summarized through a six-stage process i.e.
Free Flow (1900s-1918), Stimulated Flow (1919-1942), Ambitious Flow (1943-1961),
Controlled Flow (1962-1977), Cautious Flow (1978-1990), and Globalized Flow
(1991-2000) (Nayak, 2006).
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TABLE 4.2
LEGAL POLICY FRAMEWORK GOVERNING FOREIGN CAPITAL IN INDIA
a. Companies Act,
1951
Restrictions on the operations of managing agencies that resulted
in affecting functioning of various British companies in India.
b. Industries
(Development &
Regulation) Act,
1951.
To regulate the industrial licenses, With progressive
liberalization and deregulation of the economy the
requirement of industrial licensing have been substantially
reduced. Over the period of time, industrial license for
manufacturing is required only for the following:
i. Industries retained under compulsory licensing;
ii. Manufacture of items reserved for small scale; and
iii. When proposed location attracts location restriction.
c. Corporate Tax
Policies, 1957 to
1991
Corporate tax rates on foreign companies were intentionally
kept about 15 to 20 per cent higher than the rates charged for
large Indian companies for the period 1956 to 1991.
d. Monopolies and
Restrictive Trade
Practices Act,
1969
All applications for obtaining license for companies belonging
to big business houses and subsidiaries of foreign companies
had to be referred to ‘MRTP Commission’, which invited objections and held public hearings before granting a license.
e. Industrial Policy
Statement, 1973
Appendix 1 of the Act, clearly specified the industries where
foreign firms were allowed to operate (generally, these were
industries whose products were not produced in India or
where the domestic sector was being dominated by a single
(usually foreign) company;
f. Foreign
Exchange
Regulation Act,
1973
Hereby, foreign companies operating in India asked to reduce
their share of equity capital invested in any Indian company
to less than 40 per cent, unless they were engaged in specified
‘core’ activities (Appendix I, IPS, 1973), and were using sophisticated technology or had met certain export
commitments (led to the withdrawal and/or sale of various
foreign companies).
g. Amendment to
MRTP Act, 1985
Set a lower limit of Rs 1 billion in assets for referring company
to the MRTP Commission, limiting the applicability of the Act.
h. Foreign
Exchange
Management Act
(FEMA), 1999
Regulates repatriation of capital, profits and dividends etc. and
current account transactions.
Source: Own Compilations from Different Sources.
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The above cited policy initiatives on behalf of policy makers have produced mixed
results. These steps led to very high growth in the amount of inward FDI and the number
of joint ventures. More importantly, FDI has flowed from across the World resulting in a
globalized structure of FDI in India (Nayak, 2008). The process of reforms aim to
sharpen the competitiveness of country's enterprises and to encourage the entry of the
foreign multinational corporations in India due to certain attached benefits, yet in the
current environment of intense competition among developing countries to attract FDI,
just the liberalization of policies may not be adequate. In order to attract a greater
magnitude of export-oriented FDI, India may lure MNCs on account of her large
domestic market, abundant supply of skilled manpower and technical professionals at low
wages.
4.4 PERCEPTION OF MULTINATIONAL CORPORATIONS ON
INDIAN POLICY REFORMS
The process of liberalization initiated during early nineties free market reforms was
expected to give a push to the growth of foreign direct investment in India, however, a
huge gap can still be found in the level of expectation and the actual realization of FDI
even today. Mr Amrit Kiran Singh, Chairman of The American Chamber of Commerce
in India (AMCHAM), while submitting a compendium of position papers on key
industries to the Ministries concerned pointed out that “the poor infrastructure,
belligerent tax administration, fragmented markets, and pragmatic labour laws” remain
major hurdles to FDI. Mr. Singh argued that if these issues are resolved, multinational
companies present in India and those waiting to enter India on introduction of a favorable
policy environment would surely expand their operations in India. Therefore, based on
the analysis of above policy frameworks during various time frames and keeping in mind
the view of various renowned scholars and experts as well as potential investors, a critical
evaluation of existing impediments and remedial measures for the removal of these
hurdles (mutually benefitting) both the stakeholders is discussed in the following
paragraphs:
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4.4.1 Overlapping Central versus State Policies
It has been observed that sometimes the policy and regulations of the centre and state
governments are in conflict with each other which in turn lead to creation of a confusion
among the foreign investors. For example, from June 2007, all foreign direct investments
(FDI) in liquor business have been allowed by Union government through the
“automatic” route by abolition of the licenses earlier required for most manufacturing
businesses in the 1980s. However, in spite of taking this measure, FDI failed to move in
this sector. This happened due to continuance of the prevailing “state” laws which
require licensing as well levying of a tax in the form of excise duty. Therefore, foreign
multinational corporations are still preferring to enter into this business through joint
ventures, partnerships, manufacturing alliances, taking leases from domestic companies,
operating through “work contracts” or by acquiring domestic companies already having
licenses rather than acquiring licenses from government. This was so because, these firms
found the state laws as time consuming, cumbersome and also lacking inter-state
uniformity. Therefore, majority of these companies did not find any sense of the
privileges granted in the form of automatic route of investment provided by the union
government. This problem has also attracted the attention of Federation of Indian
Chamber of Commerce and Industries (FICCI) (Business Line, 2002). Moreover, some
states are also charging hefty amounts for such licenses e.g. Andhra Pradesh is charging
highest license fee of Rs. 2.5 Crore. Therefore, without the coordination of “Union-
State” policies, manufacturing companies will still hesitate to invest in India in spite of its
liberalized regime.
4.4.2 Exorbitantly High Tax Rate Structures
India has one of the highest corporate tax rate structures as compared to other countries in
the Asia- pacific region (KPMG, 2012; ENS Economic Bureau, 2012). India’s tax rates
are not only higher as compared to countries in the Asia-pacific region (see table 4.3), but
also when compared to other nations and economies of the World. In a review of
corporate tax rates at the beginning of 2012 in 92 countries, the average tax rate in the EU
was found to be 24.2 per cent, compared with 27.8 per cent in the OECD countries and
28 per cent in Latin America, whereas India’s tax rate was still hovering around an exorbitantly high of above 40 per cent. (KPMG, 2012).
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TABLE 4.3
TAX RATES FOR ASIA-PACIFIC REGION FOR THE YEAR 2012-13
Sr. No. Country Tax Rates/Slabs
1. Taiwan 0-25%a
2. Indonesia 10-30%
3. Korea 10% - 27.5%b
4. Sri Lanka 35%c
5. Hong Kong 16.5%
6. Singapore 17%
7. Malaysia 5% - 26% d
8. China 17%-25%
9. Vietnam 10%-25%
10. Thailand 30%
11. Japan 40.87%
12. Australia 30%
13. New Zealand 30%
14. Philippines 30%
15. India 41.82% for Foreign Companiese
Source: Own compilations from different sources.
a 0% for NT$50,000 or less; 15% for NT$50,001 - 100,000; 25% for over NT$100,000. An additional 10% on retained earnings kept for more than one year.
b 14.3 per cent for the first 100 million Won of taxable income and 27.5 per cent on taxable income in excess of that (inclusive of the resident tax surcharge of 10 per cent). c Where taxable income is SLR 5 million or less, 15 per cent rate applies. Corporate tax rate is 33 1/3 per cent for quoted public company for the first 5 years and 35 per cent for other companies. Lower rate of 15 per cent also applies to companies engaged in non-traditional exports, agricultural undertakings; promotion of tourism, construction works etc. d For companies with paid-up capital of RM2.5 million or less, 20 per on the first RM500,000 of chargeable income and 28 per cent on any balance in excess of RM500,000. For companies with paid-up capital of more than RM2.5 million, rate will be 28 per cent.
e India is criticized by MNCs for making discrimination between domestic companies and MNCs as far as tax policy is concerned as domestic companies in India are taxed at a lower rate of 33.66 per cent.
107
Moreover, if we compare the policy structure relating to taxation of one of its closest
competitors i.e. China, India lags behind in various policy measures such as:
“Two plus Three" tax holiday for Manufacturing Foreign Investment Enterprises
("FIEs") which implies that a Tax holiday for all manufacturing FIEs starting with
an initial two-year exemption followed by 50 per cent reduction in tax rate for
three years, beginning from the first profitable year after adjusting for tax losses;
Attractive tax rate of 15 per cent tax rate in Special Economic Zones; 24 per cent
tax rate in certain coastal cities;
Foreign investor reinvesting its share of profits for at least five years to get a 40
per cent refund of tax paid on sum reinvested (such refund may be granted up to
100 per cent if such reinvestment is made in advanced technology industries or
export oriented enterprises;)
For high tech FIEs, a three-year tax holiday extension is applicable. In addition,
these High Tech FIEs will be taxed at a “reduced” rate of 15 per cent to 20 per
cent;
Extended 50 per cent tax rate reduction for export oriented FIEs;
Preferential tax rates of 15 per cent and 24 per cent if investment is made in
“certain” regions; and
Dividends repatriated to foreign investors by FIEs with at least 25 per cent
registered capital held by foreign shareholders are exempted. However, these
dividends are subject to tax in Indian case.
The comparison of Indian tax rates with rest of the world clearly shows that India needs
to review its policy concerning taxes of multinational corporations. Kelkar Committee
recommendations pointed out that in future India should bring down its tax rates to
compete with other nations in order to attract FDI in the priority sectors. Efforts should
be made to amend the tax laws by incorporating newer and uncomplicated provisions
such as reduced tax rates on profits, tax holidays, accounting rules allowing for
accelerated depreciation and loss carry forwards for tax purposes and reduced tariffs on
imported equipments and raw materials etc.
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4.4.3 Lack of Developed Infrastructure
Extensive and efficient infrastructure is an essential driver of competitiveness. It is
critical for ensuring the effective functioning of the economy, as it is an important factor
determining the location of economic activity and the kinds of activities or sectors that
can develop in a particular economy (Global Competitiveness Report, 2012). However,
as far as India is concerned, existence of the state-controlled physical infrastructure is
often considered as the weakest link as well as major impediment to MNCs entry (Sheel,
2001) especially in the manufacturing sector. A survey conducted by FICCI, roughly 43
per cent of the respondents regarded India’s ports and airport facilities as substandard as
compared to international standards. Moreover, investors also remained concerned with
the lack of improvement in other infrastructural facilities such as transport, roads, power
and water availability also. However, infrastructural factor is an important decider in
choice of MNCs for starting their operations at state level (Badale, 1998). States such as
Gujarat, Maharashtra, Karnataka, Tamil Naidu and Andhra Pradesh etc. are receiving a
major pie in the share of FDI (Department of Industrial Policy & Promotion, 2012) as
compared to other states that lag behind in infrastructural facilities. Therefore, policy
relating to infrastructure definitely requires an immediate attention of the policy makers.
4.4.4 Corruption
Kumar (2000) observes that a combination of legal hurdles, lack of institutional reforms,
bureaucratic decision-making and the allegations of corruption at the top level have
dragged foreign investors away from India. Treadgold (1998) also pointed out that
foreign investors find it difficult to cut a path through the paper work of overlapping
government agencies. The gigantic bureaucratic structure has created a fertile ground for
corruption. Moreover, most of foreign investors have become apprehensive of the
country's past record of discrimination against foreign multinational companies and
India’s prior reputation of a slow, difficult, bureaucracy ridden environment to do
business (Teisch and Stoever, 1999). This is evidenced by the facts of Transparency
International, a global civil society organization which ranked India at a far away position
as compared to other Asia-Pacific countries (refer to table 4.4) in the perception of
corruption scenario by the potential investors looking for a destination to invest. The
Corruption Perception Index, 2012 is presented in table 4.4
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TABLE 4.4
CORRUPTION PERCEPTION INDEX, 2008-2012
Sr. No. Country Rank in Corruption Perception
Indexf, 2012
1. New Zealand 01
2. Singapore 05
3. Australia 07
4. Hog Kong 14
5. Japan 17
6. Taiwan 37
7. Korea 45
8. Malaysia 54
9. China 80
10. Thailand 88
11. India 94
12. Sri Lanka 79
13. Viet Nam 123
14. Indonesia 118
15. Philippines 105
Source: Own Compilations from Corruption Perceptions Index, 2012, Transparency
International.
4.4.5 Political Instability
The foreign investors perceive Indian political environment to be inharmonious and
peevish for creating an amicable atmosphere for foreign investment (Kapur and
Ramamurti, 2001). Foreign investors hesitate to invest in India due to the political
f Corruption Perception Index ranks countries in the ascending order starting from giving number “1” rank to the “Least Corrupt Country” as perceived by investors.
110
instability that in turn results in to instable policies coming in frequently and without
expectations. Moreover, the multiplicity of regional political parties results into a clear
majority at the centre level forming shaky and insecure coalition governments. For
example, there were four general elections and six prime ministers a few years back. In
such an environment, much required economic reforms turn out to be sluggish as well as
inadequate. Instead of opting for a clear and stable attitude towards reforms easing
foreign investment, governments are repeatedly concerned with diluting the reforms in
order to keep their coalition partners on board (Kripalani, 1999).
4.4.6 Inflexible Labour Laws
Global Competitive Report, 2012-13 ranked India much behind (see table 4.5) in terms of
labor market flexibility. The causes of such inflexibility are rooted in the laws and
regulations prevailing in India. As labor laws are quite stringent in India as compared to
other countries, MNC employers are generally discouraged to give a boost to labor hiring
due to the inflexibility brought out by Indian laws and regulations during cyclical
downturns. As a result, these companies are abandoned from closing down their
inefficient and unprofitable businesses.
Srinivasan (2000) considered some of the Indian labor laws as extremely outdated, rigid
and inadequate, particularly Contract Labour (Regulation & Abolition) act 1948;
Industrial Disputes Act, 1947; Minimum Wages Act 1948; Workmen's Compensation
Act, 1923; Employees' Provident Funds and Miscellaneous Provisions Act, 1952; ESI
Act 1948 and Factories Act 1948. The main problems identified in these acts include
cumbersome exit procedures, maintenance of on site records and myriad inspections etc.
Ramamurthi (2000) considers lack of an exit policy as one of the biggest impediments to
privatization in India i.e. policy to govern the dismissal of redundant workers. The
existing Indian labor laws forbid layoffs of workers for any reason (Kripalani, 1998).
These laws protect the workers and prohibit any legitimate attempts to restructure
business. Further, to retrench surplus workers, firms require approval from both
employees and state governments-approval which is rarely given (Kripalani, 2000).
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TABLE 4.5
LABOR MARKET EFFICIENCY RANK
Sr.
No. Country
Labor Market Efficiency Rank
2012-13
1. Singapore 2
2. Hog Kong 3
3. Australia 42
4. New Zealand 9
5. Japan 20
6. Thailand 76
7. Malaysia 24
8. Taiwan 22
9. Korea 73
10. Indonesia 120
11. Viet Nam 51
12. China 41
13. India 82
14. Philippines 103
15. Sri Lanka 129
Source: Global Competitiveness Index, 2012-13
4.4.7 Government Ceiling on Foreign Ownership
United States companies represented by American Chamber of Commerce (AmCham)
have cited ceiling on foreign ownership by the policy makers as the major hindrance of
Indian policy. As per AmCham, due to the barriers to FDI, India is able to attract only $5
billion from the Untied States, whereas at the same tine China grabs about $60 billion
(Business Line, 2006). These companies wish that the policy makers should remove the
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limit on foreign ownership that effectively prevents foreign control of Indian businesses
(Piggott, 2003).
4.4.8 The Excessively Rigid Role of RBI
The foreign investors blame Reserve Bank of India (RBI) for the slower inflow of FDI in
India due to various reasons such as (i) excessive rigidity in granting permissions; (ii)
delay in allowing authorization for outward remittances; and (iii) problems with
downstream investment facility under automatic route and (iv) denial of permission for
risk payment to foreign bank branch overseas (Srinivasan, 2000).
4.5 SUGGESTIONS CONCERNING POLICY FRAMEWORK
RELATING TO MNCs
The critical analysis of the policy measures introduced during the post reforms period
leads to the conclusion that much more remains to be implemented in order to improve
the consistency in policy making and executing, improving quality of governance and
overall regulatory framework as well. This is particularly imperative in the case of
foreign investments coming in sectors such as infrastructure that are evidently critical for
overall growth and development of India in the years to come. However, in spite of this,
the policy makers need to deal fairly with the decision to open up various sectors for
MNCs in India. In the light of this analysis, following suggestions are made for the
considerations of the policy makers in future:
The industrial policy statement of 1990 is ambiguous with regard to foreign
investment and technology. It fails to understand the likely impact of foreign
investment on balance of payments, self-reliance, indigenous R&D, employment
and India’s stand on MNCs etc. However, the policy statement should have been
very clear of these issues.
The rationale for various countries to restrict FDI is to avoid the risk of foreign
multinational corporations to out-compete the domestic corporations and
enterprises. However, government should undertake a careful sectoral analysis for
identification of the sectors where domestic players are unable to furnish the
113
needs of growing domestic as well as export demand for goods and services or
those do not inhibit the necessary ability or capacity to provide the required
quality standards. This will not only result into bringing the investment into those
sectors but also arousal of the sense of competition and generation of spilloversg
to the domestic players that will ultimately lead to benefiting the domestic
economy to grow in the long run.
As policy makers are interested in development of infrastructure for both
domestic and foreign interests, therefore, consideration is being given to
involvement of foreign players in creation of these facilities. Even state
governments are ready to welcoming infrastructural projects such as roads, rural
electrification, and power generation and transmission (Pathak et al., 2000).
However, care must be taken to deal with the entry and extent of investment by
MNCs in certain complex sectors in order to prevent monopolies in public utilities
to foreign firms. Liberalization of Indian economy needs to be a very cautious and
balanced liberalization instead of a “rushed liberalization”.
As it is difficult to assess the impact of liberalization in a particular industry
employing a large number of unskilled people, therefore, in such cases, it
becomes imperative to carry out an in-depth scrutinization of policy prior to take
a decision on allowing the multinational corporations in such sectors.
The policy statement must be more analytical of foreign investment as if MNCs
are given an entry in a rushed manner as a key to the problems such as foreign
exchange, inflation, unemployment, then the policy makers need to act in a very
g MNCs have both direct as well indirect effects on the economy of the host nations. In a direct manner, MNCs influence by providing benefits such as technology transfer, licensing and exporting thus in turn creating employment and transferring R&D. Besides these direct effects, MNCs also exert certain indirect effects on host countries referred to as spillover effects. The term “spillover” has not been defined aptly in the literature anywhere when referred to MNCs except by a few researchers such as Globerman(1979), Blomstrom and Kokko (1993) and Meyer (2003). In their view, spillovers are said to take place when the firm-specific assets of the advantages of the company can not be fully internalized, thus making the uncompensated benefits to leak from these MNCs to domestic companies, customers as well as suppliers in the host nation. In other words, the spillovers exist when “The MNCs cannot reap all the productivity or efficiency benefits that follow in the host country's domestic firms as a result of the entry or presence of MNC affiliates.”
114
cautious manner. This is so because, the prime motive of any multinational, be it
Indian or foreign is always profit not society.
Policy efforts may be made to invite MNCs in the sectors where India wishes to
augment its exports. This objective will be mutually advantageous to Indian
economy as well as MNCs. Export objective is commensurate with the MNCs
objective of profit-maximization. At the same time, exports will result into
generation of foreign exchange earnings. This foreign exchange can be further
utilized to import capital equipments for growth and development of other sectors.
Policy efforts must be directed to encourage MNCs to invest in agricultural
sector. This is because; majority of Indian population is dependent for their living
on agriculture. However, due to lack of investment, productivity in this sector has
remained quite low. Encouraging foreign investment in this sector will not give a
push to its productivity but also lead to creation of employment and economic
development in rural India. Further, if policy efforts are made to set up ties
between domestic companies, then it will again lead to spillover benefits to the
domestic companies in the long run. Investment in food processing industries
could be one such area.
An attempt must be made to identify the sectors where investment by MNCs will
lead to realization of economies of scale which domestic firms are unable to carry
out due to lack of capital and technological know-how. This will result in
effective capacity utilization of those sectors. Moreover, this will also lead to
reduction in prices of goods for domestic customers and enhancing of volume of
exports due to lower costs.