Author: Ens Economic Bureau
Publication: The Indian Express
Date: November 15, 2002
URL: http://www.indianexpress.com/full_story.php?content_id=13038
Introduction: Could go up 3 times
with RBI adopting IMF definition
India underestimates its annual
foreign direct investment (FDI) massively by using a narrow and limiting
definition of FDI. A high-level committee of the Reserve Bank of India
(RBI) and the Department of Industrial Policy and Promotion (DIPP) has
recommended collection of data in accordance with the international definition
of FDI recommended by the International Monetary Fund (IMF).
RBI Governor Bimal Jalan has asked
for early implementation of the recommendations. A senior RBI economist,
Dr Narendra Jadhav, has been given responsibility to complete the required
work.
If India adopts the IMF definition,
its FDI stock and annual inflow estimates may balloon several fold. Preliminary
estimates suggest that instead of an inflow of a mere $2.32 billion in
2000, India may have attracted as much as $8.00 billion, while inflows
into China, excluding 'round-tripping capital', funds sent out of China
and brought back via Hong Kong, would be around $20 billion. Enquiries
by RBI show that such 'round-tripping' capital, especially via the Mauritius
route, is insignificant in India's case.
The IMF definition of FDI includes
as many as twelve different elements, namely: equity capital, reinvested
earnings of foreign companies, inter-company debt transactions, short-term
and long-term loans, financial leasing, trade credits, grants, bonds, non-cash
acquisition of equity, investment made by foreign venture capital investors,
earnings data of indirectly held FDI enterprises and control premium, non-competition
fee, and so on.
However, with the singular exception
of equity capital reported on the basis of issue/transfer of equity/preference
shares to foreign direct investors, India's current definition of FDI does
not include any of the other above elements. China includes all these in
its definition of FDI. China also classifies imported equipment as FDI
while India captures these as imports in the trade data.
The RBI-DIPP committee has recommended
that data on 'reinvested earnings and other capital', which is presently
not collected, should be captured through a survey by RBI by making the
reporting system mandatory for the companies through modification of the
FEMA and the Industrial Development and Regulation Act.
RBI sources point out that a recent
decision of Citibank to reinvest $400 million in India is not captured
as FDI by current definition. Nor was the $300 million brought in by FIAT
in non-equity form to compensate for losses made by its Indian subsidiary.
Hundreds of millions of dollars invested through Venture Capital route
also do not form part of India's FDI statistics. All of this accounts for
a massive underestimation of FDI in India.
A recent study undertaken by the
International Finance Corporation had also shown that if comparable definitions
of FDI are used by India and China, then FDI would constitute around 1.7%
of India's GDP, compared to 2.0% for China. While China has been able to
attract more FDI than India, the real difference is not 1:10, as suggested
by last year's FDI estimates of $4 billion for India and $40 billion for
China. Rather, the comparable figures are likely to be around $8 billion
and $20 billion for India and China respectively.
A DIPP official said the biggest
challenge would be to quantify "reinvested earnings" since India has had
foreign companies here for decades and many of them have reinvested heavily
over the years. Quantifying this would boost the stock of FDI considerably.
However, even the flow in recent years would increase since several multinationals
have been reinvesting their profits in India and this is not being captured
as FDI, a practice China adopts.
