Why are we after FDI, when NRI remittances are more reliable?

Recently, Government of India has taken some decisions in the name of 'economic reforms', according to which FDI has been allowed into multi brand retail and pension funds for the first time and FDI cap for insurance sector has been raised from 26 per cent now to 49 per cent.

Normally it is believed that we need to bring in foreign investment to make up for shortage of foreign exchange and raise capital for development. This would also give strength to rupee, it is claimed. But strange is the fact the all types of facilities are rolled out for foreign companies, but Non Resident Indians (NRI's) who remit much more foreign capital, their contribution is not even suitably acknowledged.

Remittances made by NRIs have been highest as compared to diaspora of any other nation, except perhaps China. According to the recent data released by RBI, during 2011-12, once again NRI remittances have beaten FDI. During 2011-12 NRIs remitted $63.5 billion, whereas total foreign investment into the country was hardly $39.2 billion.
FDI of $22 billion and portfolio investment of $17.2 billion made this sum of $39.2 billion.

More important than this is the fact that not only quantitatively NRI remittances are more; they are more reliable than foreign investment, as upheavals in foreign investment are normal, whereas NRI remittances have been consistently increasing in leaps and bounds.
For instance during 2008-09 (year of US crisis), foreign investment inflows were down to only $8 billion, whereas NRI remittances stood at whopping $44.8 billion even in that year (higher than immediate preceding year). Thus we can say that NRI remittances are not only much more than receipts from foreign investment; its reliability is also much better.

Foreign investment we receive is of two types - one, Foreign Direct Investment (FDI) in
which foreign investor purchases shares of a company (directly from the promoters or from the market, with or without their consent) and management is transferred fully or partially. Such investment was also takes form of take-over or merger.

In addition to this, FDI may also come is now enterprises or projects. We note that between the year 1990 and 2010, whereas a total FDI of $183.6 billion was received $47.6 billion came for Mergers and Amalgamation (M&A) of established Indian companies.
So far, two pharmaceutical companies out of top 10 have been takeover by foreigners; because of which 3 out of top 10 pharmaceutical firms are now owned and controlled by foreigners. After takeover of a cement giant, ACC, majority share of cement market has already gone into the hands of foreigners. In many other sectors, foreign dominance has been on rise.

Portfolio investment

Second type of foreign investment is by foreign institutional investors (FDIs) in the form of portfolio investment. These FDIs invest in share and debt markets. Characteristic of such investment is that this investment could be withdrawn at any point of time. Thus, this kind of foreign investment is highly volatile. During the recent meltdown is USA and Europe these FIIs withdrew suddenly and stock markets crashed suddenly, leaving domestic investors in lurch, who lost lakhs of crores of rupees. Further, large scale outflow of foreign exchange, led to the downfall of rupee too.

With regard to portfolio investment, the government has been raising the cap for FII investments for different sectors. The experience so far indicates that FII investment has always been around the cap fixed for them. That is these foreign institutional investors never miss to purchase the maximum quantum of shares in each sector. Because of this so called portfolio investment, a significant proportion of shares of Indian companies have gone into the hands of institutional investors. By March 2012, the investment of these foreign institutional investor in 1502 companies had reached 9.3 lakh crores of rupees, which was nearly 15 per cent of total valuation of all the companies listed at Mumbai Stock Exchange.

Foreign investors have the basic objective of maximising their profits. They earn huge profits, when they takeover Indian companies. And when they invest in new infrastructure ventures, government provides them with high minimum guaranteed returns. As a result of their profiteering motive, they are able to transfer huge funds to their respective home countries in the form of interest, royalties, profits and dividends.  In 1992-93 total outflow of foreign exchange under these heads was $3.8 billion, which increase to $26.1 billion in 2011-12. It may be noted that in 2011-12 we got only US$22 billion as FDI, whereas total gross outflow of foreign exchange in the form of interest, profits, royalties, salaries etc. was $26.1 billion. The most disturbing aspect of the whole thing is that in the process foreigners' dominance over Indian resources has continuously been rising.

Foreign investment is not only volatile; it also leads to foreign dominance over domestic resources. Takeover of established Indian companies by foreigners and transfer of 15 per cent shares of big Indian companies into the hands of foreign investors is not a good sign for our economy. Huge transfer of foreign exchange by foreign investors is dangerous. On the other hand, remittances of NRIs not only support our effort to build huge foreign exchange reserve, they do not involve any big liability for the nation.

We can understand that for high-tech industries, we may require foreign investment. However for foreign exchange resources NRI remittances is a much better option.
Therefore, we need to give preference to NRI deposits and therefore, we should attract more and more funds from NRIs for the development of the economy and for financing the deficit in balance of payment.