India’s FDI inflows set to ‘jump’ massively
Author: Ens Economic Bureau

India’s FDI inflows set to ‘jump’ massively
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.