FDI in manufacturing: bliss or bane?
Change in FDI norms introduced for the manufacturing sector will significantly boost inflow, says Nath.
By Manika Gupta, INDIATIMES NEWS NETWORK |
Bracing up the manufacturing sector is suddenly high on the government's agenda. On Tuesday, commerce minister Kamal Nath announced easier FDI norms for the manufacturing sector especially in sectors such as leather, pharmaceuticals and engineering goods and industries. He noted that FDI inflows into the manufacturing sector had risen by 75 per cent to over $2 billion in 2005-06. The aim was to double these inflows over the next two years.
Referring to the Government's target of eight to ten per cent GDP growth, the minister said this would require a 12 per cent growth in the manufacturing sector which covered all industrial activities except power, water supply and mining. The latest data showed that the manufacturing sector grew by 10.4 per cent in April and 12.2 per cent in May this year.
The commerce minister noted that the aim was to double these inflows over the next two years. Referring to the Government's target of eight to 10 per cent GDP growth, he said this would require a 12 per cent growth in the manufacturing sector which covered all industrial activities except power, water supply and mining.
The industry is opposed to FDI as it feels that inflows can crowd out domestic enterprises and actually reduce host country welfare. A study has examined the effect of FDI inflows on domestic investments for a large sample of developing countries in a dynamic setting and has found that 29 countries experience a net crowding out effect while 23 experience crowding in.
In general, crowding-out dominates the relationship in most countries.
According to the industry the quality of FDI should be judged from indirect effects, spillovers on economic activity in the host economy. Many countries employ policies and regulations such as screening mechanisms, performance requirements and incentives to maximise favourable externalities. In general, the objective of such policies is to maximise the chances of FDI crowd-in rather than crowd-out domestic investment.
FDI through greenfield investment has better chances of generating positive externalities, compared to the acquisition of a running enterprise though at times acquisition can be favourable. Some countries discourage the latter.
The commerce minister noted that the aim was to double these inflows over the next two years. Referring to the Government's target of eight to 10 per cent GDP growth, he said this would require a 12 per cent growth in the manufacturing sector which covered all industrial activities except power, water supply and mining.
The industry is opposed to FDI as it feels that inflows can crowd out domestic enterprises and actually reduce host country welfare. A study has examined the effect of FDI inflows on domestic investments for a large sample of developing countries in a dynamic setting and has found that 29 countries experience a net crowding out effect while 23 experience crowding in.
In general, crowding-out dominates the relationship in most countries.
According to the industry the quality of FDI should be judged from indirect effects, spillovers on economic activity in the host economy. Many countries employ policies and regulations such as screening mechanisms, performance requirements and incentives to maximise favourable externalities. In general, the objective of such policies is to maximise the chances of FDI crowd-in rather than crowd-out domestic investment.
FDI through greenfield investment has better chances of generating positive externalities, compared to the acquisition of a running enterprise though at times acquisition can be favourable. Some countries discourage the latter.
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| The industry is opposed to FDI as it feels that inflows can crowd out domestic enterprises and actually reduce host country welfare |
Even though there is an effort to lead the manufacturing sector by FDI, key industry spokesmen feel that resurgence in manufacturing will largely come from the domestic industry. Looking at what happened to Posco in steel, Volkswagen in automobiles and TCG-Basell are upping their global capacity in polypropylene production. Motorola is another company which failed to establish a manufacturing base.
The apex chamber, Federation of Indian Chambers of Commerce and Industry (FICCI) feels many sector-specific issues need to be corrected for any investment, whether domestic or foreign.
Drug and pharma sector:
*The study states that in the drugs and pharma sector the Existing Drug (Prices Control) order is very faulty.
It needs to be reviewed.
*As of now, need for formation of National Drugs Authority (NDA) to avoid controls by one agency.
*Patent protection should be accorded to all inventions provided they are novel and have commercial applicability.
*All pharmaceutical preparations should be governed by the Drugs and Cosmetics Act and not by Narcotic Drugs and Psychotropic substance (NDPS) Act
*To promote at least 10 centres of excellence to provide training and education in the modern pharma science.
For the leather industry:
*There is a need for effective functioning of Inter-State Trade Council.
*Setting up of training centres to train people for leather industry, linking the NREGS with the training of personnel to make it more effective, useful and meaningful.
The apex chamber, Federation of Indian Chambers of Commerce and Industry (FICCI) feels many sector-specific issues need to be corrected for any investment, whether domestic or foreign.
Drug and pharma sector:
*The study states that in the drugs and pharma sector the Existing Drug (Prices Control) order is very faulty.
It needs to be reviewed.
*As of now, need for formation of National Drugs Authority (NDA) to avoid controls by one agency.
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*Patent protection should be accorded to all inventions provided they are novel and have commercial applicability.
*All pharmaceutical preparations should be governed by the Drugs and Cosmetics Act and not by Narcotic Drugs and Psychotropic substance (NDPS) Act
*To promote at least 10 centres of excellence to provide training and education in the modern pharma science.
For the leather industry:
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*There is a need for effective functioning of Inter-State Trade Council.
*Setting up of training centres to train people for leather industry, linking the NREGS with the training of personnel to make it more effective, useful and meaningful.
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