the first part of this series published yesterday, I had pointed out how just 28

multinational companies in India (for which data were available from published
annual reports) caused a foreign direct outflow of Rs. 15,368 crore in 2011-12,
which was 7 per cent of the FDI of Rs. 227,000 crore ($46.5 billion) received by
the country that year (Table 1*).
The Government is pushing for FDI to address the current account deficit.
However, evidence points to the fact that FDI sets up large continuous FDOs
outflows of foreign currency year after year, well into the future.
The thrust on FDI being emphasised by the Government now is potentially
harmful as it can aggravate the current account deficit. It must be mentioned
that such outflows are within the legal framework, and therefore it will be difficult
for future governments to remedy this.
TRENDS IN FDO
We analysed the foreign direct outflows caused by 25 multinational companies,
based on their published annual reports, over the past four years.
This is an analysis based on information available, and should not be seen as a
special sample of companies.
There were six consumer product companies, five from pharma, nine engineering
companies, two automotive, and three others. The data are presented in Table 2.
The 25 companies caused a FDO of Rs. 6,881 crore in 2008-09. This jumped
to Rs. 15,270 crore in 2011-12, an increase of 124 per cent in four years. As a
percentage of sales, the jump is from 8.6 per cent to 14 per cent. Royalty plus
dividend payments, which were 1.4x share capital (the FDI) in 2008-09,
increased to 2.2x the share capital four years later.
The biggest item of FDO is the cif imports, which represents the goods imported
by these companies (in finished or semi-finished form), for sale in India.
The FDO of these 25 companies alone accounted for 4 per cent of the total FDI
received by the country in 2008-09, and this jumped to 7 per cent of the FDI
received in 2011-12 (See Table 3 for details).
What is the FDO of all remittances made by the thousands of multinational
companies operating in India? From the preliminary examination done, this is
likely to be very significant, and a major contributing factor to the current
account deficit of the country.
NATIONS WITH A SURPLUS
Without assessing this, a concerted effort is underway to promote FDI to address
the current account deficit. The results could well be the opposite as this can
exacerbate the deficit problem and cause further depreciation of the rupee.

What about those countries with a current account surplus? How do they achieve
this, and what is the source of such surplus?
Table 4 lists the top 20 countries in the world with a current account surplus.
Topping the list is Germany, a champion exporter of manufactured products, with
an enviable annual surplus of $208 billion. This is followed by the other
manufacturing champion China with an annual surplus of $170 billion.
There are ten countries on the list whose surplus is based on natural endowment
of oil and gas, with Saudi Arabia heading this pack.
The important point to note from this list is that for nine of the ten countries with
a non-oil surplus, the source of the current account surplus is manufacturing
exports or even agricultural exports. Eight of these countries depend almost
entirely on imported oil, much like India. Each of them has strategically built
world-class manufacturing to drive exports and the surplus.
BEAT THE DEFICIT
The route for India, from the global experience, is clear. The current account
deficit can be beaten only with strong, globally competitive exports.
Fortunately, compared to many of the smaller nations on this list, India is blessed
with a range of high-potential industries and a vast agricultural sector where it
leads the world in many areas. Regrettably, India lacks a national strategy to
build global competitiveness in exports.
When we study the success of other nations on this list, it is clear that each of
them has first built its position of strength with a wilful effort. They have ensured
that their respective interests are well taken care of by building export
competitiveness before opening their economies to the winds of global
competition.
FDI is not the answer when the basic requirement of forex surpluses is not being
generated.
This is for the simple reason that todays FDI sets up continuous annuity
payments, or FDO, for times to come.
If FDI is the strategy to bridge the current account deficit, this is akin to reliance
on a Ponzi scheme to repay debt. As we all know, that never works.
Building exports is the only sustainable way to beat the current account deficit.
Can we put the nations interests first and get on with this job?
(This article was published on April 12, 2013)
RELATED
NEWS
The FDO in FDI I

TOPICS
economy (general) |currency value |foreign direct investment |foreign
exchange |government debt |
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