The Economic and Social Impacts to India and Its Citizens from Inward Foreign Direct Investment



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8.4: Perceptions of FDI policies


This section will explore respondents’ views regarding FDI policies and the government’s ability to construct effective policies to minimise disadvantages and maximise benefits of TNC investment. The overwhelming majority of respondents, whether liberal market oriented or human rights oriented were critical of FDI policies and the government’s ability to construct them. A view that was commonly reported was the government did not have a coherent strategy for attracting FDI and extracting the benefits but rather, pursues a strategy to get FDI regardless of development needs, the needs of the people, or environment.

AB, Director of an NGO that works to promote social equity and justice, suggests the preoccupation with FDI is resulting in policies that are not taking into consideration the needs of the people or the environment and this has hindered the ability to hold corporations accountable for their actions. He illustrates this point with a reference to the Bhopal tragedy, a major and deadly industrial disaster, and the concern from a high ranking government official that compensation claims could hurt the investment climate. He explains:

But what has happened, and I think this is where the real problem is at the national level, the mood of politics and at least of our economics is that we have to get FDI come what may. This has meant that we have created policies irrespective of our actual needs or the rights of the local people. So you trample upon whether it is the environmental concerns or the rights of the local people or the livelihoods of the people in the local communities...you don’t look at that… and the paradigm is such that ‘let’s just get FDI anyhow.’ And therefore you are tinkering with the larger policy framework in such a drastic fashion that it might lead to huge difficulties. And my sense is that it has already led to difficulties in terms of lack of corporate accountability and so on. So just to give you one example during the hearing of the Bhopal gas tragedy, the government had the ‘cheek’ to actually say that if the compensation is too high that the climate of investment would be adversely affected. I cannot quote from where but I am very confident that someone very responsible said this. So you have 10,000 people who have died and you are willing to compromise on something as drastic as that so that the business climate remains positive.

KT is a distinguished researcher with a national-level policy research organisation in the public domain that concentrates on India’s industrial development and the corporate sector. His area of specialization is FDI. He was critical of the Indian government’s understanding of FDI and suggested it was seen as the answer to all development problems. In line with the government’s priority of high GDP growth which, arguably, is seen as the answer to poverty, there appears to be a prerogative of high FDI as an overall strategy in and of itself:

There are two things with government thinking...one is that FDI is good and so you do whatever is necessary to get it and, two, FDI will come and deliver what we need. There is this belief that FDI does so much...that is the main thing which the policymakers have been unable to break away from. That is the problem that they are stuck with: that FDI will cure all.

One way in which the government can better mitigate disadvantages and extract benefits from foreign investment is to devise and implement a proper regulatory framework before liberalising sectors of the economy (OECD, 2002; OECD-ILO, 2008). AMK is a senior Professor with one of India’s premier economic policy think tanks. Her research has directly contributed to India’s negotiating strategies in the WTO and her research interests include world trade, FDI, and the service sector. She was critical of the government’s ability to construct and implement effective regulatory environment around FDI policies:

Sometimes even when FDI is opened up, we open up FDI without regulations or we open up FDI with so many stringencies like what happened in retail… You open things up and then you find the regulations are not in place. Regulation in India is not like a country like Australia which should come hand in hand...when you think about privatization you should also think of the regulatory framework to support privatization. But here, your regulation is always with a 2 or 3 years gap after the liberalisation; it should have been the other way around.

As discovered in Chapter Seven (see section 7.4) the frequency with which brownfield investments are occurring in the pharmaceutical sector was criticised and concerning due to public health implications. Respondents were critical of the government’s ability to devise effective FDI policies for this sector. DA is a Professor of Science and Technology for an organisation devoted to the study of science, technology and developing countries. One of his areas of expertise is intellectual property rights, TRIPS and the pharmaceutical industry. DA was critical of the government’s framing of FDI policies when TRIPS legislation came into effect in 2005. He explains that the government could have been more selective and provided incentives for investments that would have been beneficial to India. Had the government done this, he observes, there could have been more gain for both from foreign companies as well as the citizens of India:

Brownfield investment should have been discouraged...they should have said that you will only make greenfield investments. They should have said that they will incentivise greenfield investment in certain areas if, for instance, you tackle certain disease areas which are critical in our own case...for which we do not have, at the moment, our own capabilities… if you come and tackle those then we will incentivise you… we will give you certain tax exemptions, etc. …while we allow you to exploit our existing markets which are dependent upon out of pocket expenditure of richer consumers and so on where high margins are available. When you target or fine tune your policies to get the best from every actor whether they are FDI, whether it is domestic, whether it is large firm, medium scale, or small scale firms; you will benefit.

DA’s comments highlight the importance of constructing selective investment policies that are tailored to the development needs of the country. Several respondents stressed that stipulations should be implemented in investment policies. Respondents often stressed that what is important is the quality of investment that is important not the quantity of FDI.

GK is a legal advisor to an international NGO involved in North-South development issues. His area of expertise is pharmaceuticals, access to medicines, and trade related intellectual properties. He discussed the need to target specific types of investment in the pharmaceutical field. He alluded to India’s failure to selectively promote quality FDI. He questions why FDI is allowed in the manufacturing of medicines when this is not what India needs at present:

If you look at the fundamentals of FDI ...what are the objectives of FDI? Allowing FDI is for either employment opportunities, acquiring technology capabilities, or enhancement of management. So in India if FDI is in direct manufacturing of medications, we don’t need any of this investment. For India the next step is to move to the product development—the new product development. And product development not in the sense of existing chemical entities; but new chemical entities from molecule stage to product stage. And that is where the [FDI] cap exists! So we need FDI in that field and not really in the manufacturing of generic medicines. So what is the rationale of allowing FDI in India’s medicine manufacturing sector?

GK drew connections with the government’s difficulty in creating effective FDI policies with a diminished capacity to monitor what is happening in the markets. He suggests that as part of economic liberalisation, the government dismantled the framework that had previously supervised the private sector during the protectionist days and, subsequently, has not constructed any monitoring mechanisms in its place. He was referring to the increasing number of acquisitions of Indian pharmaceutical companies by global pharmaceutical TNCs and the dangers these take-overs posed to availability of generic medicines. He remarks:

So what happened in India, it is a kind of personal observation, what has happened is that government ...part of liberalisation is that government has removed many license requirements and that is fine if it is blocking the ability of people to do business, etc. But also in this process the government also withdrew some of the monitoring mechanisms... withdrawal of these monitoring mechanisms resulted in a situation in which the government has no capacity to monitor what is happening. And as a result the government lost its ability to come out with effective policies. So they are making policies that are based on newspaper reports, hear-say, and also on private actors which have vested interest.

Several stakeholders argued that the government is not constructing effective policies for FDI because it is failing to implement the findings and suggestions from research and policy think tanks. AMK, senior Professor with one of India’s premier economic policy think tanks, referenced two issues that were commonly reported by respondents: one, the government is not implementing the input from the consultations with think tanks and two; the discord within Parliament itself is hindering the construction and implementation of effective policies. She explains:

The problem is between getting the inputs from think tanks and implementing the inputs. The government is consulting with think tanks and others on policy issues but not implementing the recommendations. When they go to the final stage of implementation, they generally go with what they think is good and, you know the populist voting kind of a principle rather than a proper regulating kind of principle. And lobby is working very hard because the government is a coalition government...and the lobbying infrastructure is very strong in India. Yes, so finally it is not about what is the best policy...everybody knows the best policy...but are they implementing the best...that is the problem, the core issue in India.

KT, distinguished FDI research analyst, discusses similar concerns regarding neglect of input from think tanks in the final policy:

They consult with committees or think tanks but don’t include the findings in the policies. In fact I will give you a copy of a report which is damning of India’s FDI policy. It is a paper which was submitted by the National Manufacturing Competitiveness Council and it is called Report of the Prime Minister’s Group: Measures for Ensuring Sustained Growth of the Manufacturing Sector...but we do not see its findings being reflected anywhere in the new manufacturing policy.

RO is a representative and economist with an international organisation concerned with monitoring the global economy. He described that the politics of policy making often result in “policy paralysis”. He describes implementation problems resulting from the ‘cacophony of democracy’ within India:

So there is a lot of consensus at the senior level, at the technical level, and in the business community on what will be good for the country. The problem is implementation of some of these policies in a lot of these areas. It is a very argumentative culture if that makes sense. There are many different positions and views...it is a cacophony of democracy in many ways, combined with continued vested interest which are blocking a lot of these things that prevent the implementation stage. So things actually take a lot longer to get done.

This mirrors responses from several respondents who underscored the fractious nature of politics that kept the government from constructing and passing needed policies through Parliament. This finding is similar to Murali’s (2010) conclusions which argued business influence within policy making is often hindered by coalition politics as well as what she termed the ‘politics of opposition’ which described the discontinuity between party stance when in opposition and when in power.

Other participants indicated that there were good investment policies with afforded protections to help mitigate costs but that implementation of the policy or the protective elements within the policy was problematic. LN is a Senior Research Fellow with an organisation concerned with energy use and sustainable development. She also works with the World Economic Forum on issues concerning regulatory and governance issues involving energy, minerals and the environment. She highlights that India has a good policy framework in place but the enforcement of the policies are not happening which is problematic for people and the environment:

Well we have all the right frameworks in place. We now have a Minerals Act which actually has a sustainable development framework built into it...which is rare in any country so we actually have that. And we have had an environmental framework for many years which was a very good framework but the problem is that we do not enforce that. And because we do not enforce this, we have a large number of issues...whether it is due to human lives or whether it is to do with the environment. There has been a lot of impact because of lack of enforcement. We have great laws, ahead of the curve...people have invested in them but they are just not being implemented. So the problem in India is not absence of framework or absence of rules...there is no implementation.

LN emphasizes that the policy framework, at least in her field, has better policies and regulations regarding the environment compared to human welfare:

The larger question that you have with FDI beyond mining so it cuts across all sectors is that we do have very good governance frameworks in this country...we are better off with the environment than the social side. So if you are doing a study, if you are doing an analysis, please look at the social frameworks because the social frameworks are not as strong as the environmental frameworks in terms of protection when investment comes in. Because for the environment we did a big study with compensation issues where we look at all the different impacts that these resources can have...and we did this for oil, minerals, gas, everything...and irrespective of whether it is an Indian investment or a foreign investment, what came out from that analysis is that most of our environmental issues—whether they are enforced or not is a different question— but we have regulated for it but in the social side, we have not. We have not taken into account cultural aspects, social aspects, health aspects...none of these have been taken into account. So our social frameworks for investment are far less developed than our environmental frameworks.

LN goes further to suggest the implementation problems are down to a combination of factors including capacity, lack of resources, corruption, and absence of benchmarking:

It is a number of things. But one is to do with the capacity to implement, capacity to take this forward, one is lack of resources, one is the country is huge, one is money and corruption. Corruption...so somebody gets paid to overlook whatever is happening. So there are a variety of reasons, you cannot just pinpoint one and say it is because of this. It is a combination of these things. It is also sometimes an absence of benchmarking so you may have the rules and the framework but the person who is implementing it is unable to see how much better it could be...maybe because of lack of exposure, maybe because we have not introduced the best practices.

These are the arguments and perceptions concerning FDI policies and of the government’s ability to construct policies that mitigate negative consequences and promote advantages.



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