Kamal Nath picking FDI numbers out of a hat?

New Delhi: A month after gloating that foreign direct investment (FDI) inflows had risen at a never-before rate of 41% in 2005-06, the minister of commerce and industry, Kamal Nath, is at it again.

On April 19, Nath had said FDI would touch $7.5 billion in 2005-06. Today, in a press release on the eve of his departure to Poland, he upped this figure to $8.3 billion, a record 50% increase over $5.5 billion in 2004-05.

That’s not all. Nath boasts that the equity component alone in 2005-06 was $5.1 billion, a 60% increase over 2004-05, that reinvested earnings and other capital would total $3.2 billion and that in the month of March alone, $831 million worth of FDI came in (a 200% increase over March 2005).

But some scepticism is in order. At least until such time as the Reserve Bank of India (RBI) - the main source of FDI data - releases figures for 2005-06.

The only numbers RBI has put out are the April 2005-January 2006 figures in its April monthly bulletin.

Industry secretary Ajay Dua said the data released were based on the figures the RBI sends in advance for confirmation and comments before making them public. RBI will release the whole year data only next month.

The propriety of going to town with figures sent for comments and confirmation apart, there’s a slight problem with the statistics as well.

The growth percentages, for one, aren’t as high as Nath claims. The increase in total FDI is only 46.8% (not 50%) and the rise in equity is only 36% (not 60% that Nath claims, though the release cleverly does not mention the previous year’s total equity figure).

Dua insists the growth figures are correct because the 2004-05 figures are lower than what is in RBI’s April bulletin.

He could be right because the 2004-05 figures are provisional. Economists, while agreeing that provisional figures are revised, say RBI provisional figures cannot be so off the mark as to convert a 36% increase into a 60% one. The RBI spokesperson didn’t want to comment on this immediately.

But a far bigger problem lies in the claim made on reinvested earnings (profits that foreign firms retain within the country instead of repatriating to the parent company abroad) and other capital (inter-company debt transactions of FDI entities), both of which are not new investments coming in.

Kamal Nath’s (pictured) statement admits that the RBI has not released 2005-06 data for these two categories. “However, taking past trends into account, reinvested earnings and other capital would be about  $3.2 billion,” the statement said.

Rajesh Chaddha, chief economist at the National Council of Applied Economic Research (NCAER), is puzzled at what kind of trends could be seen from five-year figures (these two figures are available only from 2000-01).

The only trend that is possible to work out, he says, is to see their ratio to equity. On working this out, it was found that the projected figure on reinvested earnings and other capital was considerably close to Nath’s $3.2 billion claim.

But economists balk at using this projection. “But this is only a guesstimate, not even an estimate,” sneers Chaddha.

In any case, reinvested earnings will depend on the profits a company makes and on company policy - whether or not to repatriate profits - neither of which can be predicted or projected, a point Abheek Barua, chief economist, ABN Amro agrees with.

Unless you do a detailed analysis at the balance sheet level, this is almost impossible to project, he says. Clearly, there are no takers for Nath’s big talk.