The opening up of infrastructure to FDI can be a blessing if the government is careful. Charan Singh, Chair Professor of Economics at IIM Bangalore, who is an expert on FDI in infrastructure, tells Praveen Bose what opening up of infrastructure to FDI means. Excerpts:
What does opening up of infrastructure to FDI mean for nation?
Infrastructure includes energy, power, coal, road, railways, telecommunication, civil aviation and ports. The Government in its recent circular dated November 10, 2015 does open up many components of infra sector for FDI.
I think it is a good move to boost the economy, as it will help in supplementing domestic savings and investment which are essential for economic growth. It would lead to increased opportunity for employment in infrastructure sector, implying some enhanced absorptive capacity for increasing population, generally young people under demographic dividend. India has to create nearly 120 million jobs in the next 10 years, a challenge in itself. Therefore, working on all engines is important like encouraging micro, small and medium enterprises (MSMEs) and FDI.
What can it bring in?
Generally, FDI brings with it the latest and cutting-edge technology, which is expected to be efficient and environmental-friendly. FDI also encourages global integration and inflow of resources. In fact, empirically, FDI is more stable and useful than capital inflows. FDI is correlated to industrial production and therefore encourages MSMEs. There is immense potential for FDI in MSMEs dedicated to defense industry as India continues to import nearly two-third of its defense equipment from abroad.
What are the risks involved?
FDI carries the risk of rendering domestic industry inefficient and therefore has to be cautiously examined. India would need, both capital and labour-intensive technology, to be globally competitive and to absorb labour force.
What precautions should be taken on FDI in infrastructure?
The government must ensure that the technology transferred is not obsolete and the arrangements for Transfer of Technology is provided so that domestic manufacturers are able to modify the product, especially in defence equipment. This would ensure India is able to customise the product to meet specific needs and requirements of a dynamic population.
What are the sub-sectors that can ideally be opened to FDI in infra?
There are various sectors which can be encouraged. Illustratively, India has a shortage of housing, especially, for economically-weaker sections of the society. The western world has technology to build cheap and eco-friendly houses. Germany has technology where houses are able to provide power to the grid because of energy efficient construction.
India continues to struggle with power shortages and therefore, power sector is one where FDI could be encouraged. The high number of call drops is unique to India and FDI could help get know-how to plug the gaps. The phenomena of call drops is detrimental to financial inclusion and stand in the way of Make-in-India efforts.
Railways are the arteries of India and technology to ensure safety and swift movement could help, especially in terms of locomotives, carriages and telecommunications.