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Wednesday, 17 September 2014 05:44
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FDI commitments from Japan/China relatively easy

Though many, including RBI, fear an outflow of FII funds when US interest rates begin to turn, the obvious antidote to that is increased FDI. While the Japanese government has committed to invest $35 billion in India over the next 5 years, media reports suggest President Xi Jinping of China will announce a number around three times as large. Given average annual FDI inflows into the country over the past five years have been around $28 billion—FII flows were $22 billion—that’s a lot of money India is hoping to get from Japan and China and equals around half of all current flows from both FII and FDI. While the amount is more than enough to stabilise the rupee—and we are not even talking of the $50 billion swap agreement with Japan—the obvious question is of whether

India will be able to absorb it. Given the huge infrastructure deficit, there is little doubt India can do with the money, but that is of little consequence if projects are not cleared in time to be able to use the money. As this newspaper has pointed out before, in the case of Japan, except for FY12, India has barely used more than 30-40% of committed funds—while only 31% of the R23,180 crore that was committed could be taken in FY13, this figure was a mere 18% of the R6,812 crore assured till June in FY14. Indeed, valuable time has been wasted agonising over whether India wants Japanese funds tied to buying Japanese equipment in the cities planned under the DMICDC. In the case of the Dedicated Freight Corridor that was being funded by the Japanese, the Indian side keeps expressing its unhappiness with ensuring tenders are awarded to only Japanese firms.

Given the government has recently cleared FDI in railways, it will be easier to absorb Japanese and Chinese funds into areas like bullet trains, but what of the money the Chinese will like to spend in setting up industrial parks or SEZs? The SEZ policy continues to remain in a flux thanks to the government imposing taxes after the SEZ Act promised a zero-tax status, and though the commerce minister has said a solution is to be found soon, it is not clear what the solution is going to be. And till the UPA’s legacy Land Acquisition, Rehabilitation and Resettlement Act is not either scrapped or substantially modified, it is not clear how the land is to be acquired for such projects. Similarly, apart from the huge asymmetry in India-China trade—India exports primarily raw materials and imports finished goods—India also needs a coherent strategy towards China. It is difficult to see how it can want large Chinese FDI in certain areas while considering China a huge security threat in others—will India allow Chinese firms to manufacture telecom equipment in India or will this be frowned upon given the simmering tension between the two countries? It is also difficult to see how India can want large amounts of Chinese investment without granting it ‘market economy’ status, something that officials say is not going to happen. Are Japanese pharma firms going to be allowed to buy brownfield pharma units in India? Investment commitments from the two Asian giants is relatively easy, now to make them happen.



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