BW Communities

Domestic, Not Foreign

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[FDI is not relevant. At least not as relevant as domestic investment. In the whole debate about the quality, quantity and restrictions of foreign direct investment, economists and politicians are forgetting about the importance of domestic investment. In any dynamic and healthy economy, FDI is a small part of total investment. In a strong economy, domestic investment is the bread and butter while foreign investment is the jam. The debate sparked by the comments of US President Barack Obama has distorted the debate on investment.  Fresh domestic investment must grow to create jobs. Even if India were to lift all caps on FDI, the economic activity in the country will not be recharged. But if domestic investment grows, foreign investment will naturally grow. The government's own figures show that domestic investment is sliding fast. Since the delicensing of manufacturing activity, companies that launch new projects don't have to take permission. But they need to file details of their projects. This filing is called and Industrial Entrepreneur Memorandum (IEM). It's an indicator of fresh investment activity in the country. Unfortunately, this figure is falling. For instance, in March 2011 investment worth over Rs 15,000 crore in 409 projects was promised under IEMs. A year later the figure was less than half at Rs 6,900 crore for 277 projects. The IEMs also mention the number of people employed. Not surprisingly, the figures are negative here as well. From 2006 to 2011, the annual number of proposals have halved and employment fallen. It should have been the opposite. Investment and employment should have doubled, not halved. The fall in industrial output numbers is known. So is the fall in growth of capital goods industry. Combine these two with lower figures of IEMs and you get the frightening sigh of an economy winding down.  Indian industrialists are struggling to keep up with the costs of credit. At best they are managing to keep the existing operation going with their revenues. But even if demand rises, they are not ready to expand and invest for the growing market. So this raises the spectre of another crisis. A few months later, supply of manufactured goods will not be able to meet demand. Without capacity addition, even basic consumer goods will be short supply. This could trigger a fresh spiral of price rise and inflation. What then? Touting FDI figures will not help. It's imperative to feed domestic expansion needs. FDI will take care of itself. FDI can't exist in isolation to domestic investment. It works only in those countries that have little or no domestic industry. India has never been in such a country. Here manufacturing is centuries old. Therefore to have a debate only on foreign investment and not domestic is missing the point. Even if the political leaders don't want to worry about the investment figures, they should worry about the monster of scarcity of basic products. This fear is closer than expected. It will be tough to blame domestic scarcity on Greece. (Pranjal Sharma is a senior business writer. He can be contacted at pranjalx@gmail.com)