India’s FDI regime must garner quality investments

In 1991, India shed her cautious approach and took a series of policy measures to attract Foreign Direct Investment (FDI). Consequently, India has opened up most of its manufacturing and service sectors unconditionally for FDI.

In certain cases, FDI is allowed with some conditions. However, a number of times, these conditions fail to serve their purpose. For instance, the cap on FDI such as the 49 per cent cap in the insurance sector does not ensure management control in Indian hands. 

Liberalisation of FDI policy has become the new yardstick to measure a government’s commitment to economic reforms. As a result, successive governments removed regulations on FDI without assessing the consequences. The latest step is the abolition of the Foreign Investment Promotion Board (FIPB) and the delegation of its functions to discrete departments. 

Even though India is one among the top 10 destinations of FDI, the quality of FDI is a matter of worry. FDI inflow data shows the service sector is attracting a substantial percentage of FDI. However, this influx of FDI is not contributing to a transfer of technology and streamlining of the manufacturing sector. A report of the Prime Minister’s groups on manufacturing in 2008 stated that “in view of the liberal FDI policies, companies from abroad are reluctant to part with technology even for purchasing”.

Further, Mauritius and Singapore are the two top sources of FDI inflow into India. There is ample evidence to show that a major chunk of this FDI could be round-tripping of funds to evade tax. Further, company data of many foreign firms show negative foreign exchange balance in their accounts due to an outflow of funds via royalty transfer and transfer pricing.

From an FDI quality point of view, greenfield FDI is preferred to brownfield FDI because the latter does not result in fresh investment or job creation. Unfortunately, data from the Department of Industrial Policy and Promotion (DIPP) on FDI does not provide disaggregated data on greenfield (new investment) and brownfield (acquisition of existing business) investments.

Some of the FDI policies have a direct impact on people’s lives including sensitive sectors such as public health. Under the current regulation, a foreign company can acquire up to a 74 per cent stake in a brownfield Indian pharmaceutical company without any permission from the government i.e., via the automatic route. A foreign company can also make a greenfield investment in a pharmaceutical company through the automatic route. In the case of medical devices, 100 per cent FDI is permitted without any difference between greenfield and brownfield. A study by ISID shows that nearly 84.9 per cent of FDI in the pharmaceutical sector from 2008-09 to 2011 -12 came through brownfield investment.  

Brownfield investment in pharmaceutical companies is problematic. First, it undermines the self-sufficiency and availability of affordable medicines because foreign companies might be interested in selling costly medicines to recoup their investment rather than meeting public health needs. This can be true in the case of Indian companies too. However, the government can effectively regulate these companies. Foreign companies would resist efforts to regulate profits through measures like price control using political and legal pressures. Therefore, a pharmaceutical sector dominated by foreign companies would threaten India’s health security. Second, if technologically advanced Indian pharmaceutical companies come under foreign control, it undermines the ability to use compulsory licenses in the Patents Act to produce generic versions of patented medicines to meet public health needs.

Similarly, FDI policy on medical devices also threaten India’s self-sufficiency and availability of affordable medical devices. Currently, the government could use price control on cardiac stents due to availability from domestic companies. A few brownfield investments can incapacitate the government from taking such measures. 

It is important that the government move away from the current quantity-oriented approach on FDI to a quality-oriented evidence based approach and take into account long-term socio-economic needs. 

The author is a researcher associated with the Third World Network