India sees the value of its
NRIs By Kunal Kumar Kundu
KOLKATA - From Not Really Indians to an
uncharitable epithet of Non-Reliable Indians to
Internationally Respected Indians, Non-Resident Indians
(NRIs) have come a long way.
Not very long
ago, NRIs were considered fair-weather friends. Possibly even
now. But people tend to forget that whenever it comes to
investment, nobody in altruistic. Not even resident
Indians. Investment decisions are driven by economic
logic rather than sheer jingoism. A common refrain
indicting NRIs is that while non-resident Chinese have
played a major role in economic development of China,
NRIs have not. While doing so, however, differing
circumstances are conveniently forgotten.
An
important explanation for the differing performance
relates to the nature of development strategies and
policies in the two countries. China's open-door policy,
including liberalization of foreign direct investment
(FDI), started in the late 1970s, whereas India's
liberalization only started in the early 1990s, a gap of
about 12 years.
China began attracting FDI
initially in its Special Economic Zones as part of its
coastal development policy, whereas India, while opening
up the whole of the economy, retained high restrictions
on sectors of entry and levels of foreign participation.
There was also a significant difference in the broad
aims of industrialization strategies: independent India
adopted an import-substitution policy, providing high
trade protection for domestic firms operating in both
the private and the public sectors.
Even after
the reform process started in 1991, there remained many
restrictions for foreign firms wanting to operate in the
Indian market. Only during the past five years has
India's FDI policy become appreciably liberal.
In China, on the other hand, once opening-up
started, emphasis was placed on export-oriented FDI.
Although this increased FDI, especially from
non-resident Chinese and from other Asian countries such
as Japan, South Korea and Taiwan, it also encouraged
round-tripping through funds channeled by domestic
Chinese firms into Hong Kong and reinvested back in
China to take advantage of special fiscal incentives
given to foreign investors and/or to circumvent
regulatory restrictions.
Clearly, a
substantial portion of Chinese FDI is simply domestic
investment masquerading as foreign investment. More important,
it clearly establishes that economic logic
influences investment decisions for which one might even
assume extralegal means. Why then criticize NRIs?
The
issue is, China has come up with a more liberal FDI
environment than India's. Clearly, policies were much
more conducive in China than in India. The very fact
that it took India nearly 10 years after the reforms
started to set up a steering committee to look into ways
of increasing FDI inflows is an adequate pointer to the
fact.
However, before going into the issue of
physical capital, it would be in order to talk about
India's intellectual capital. The very fact that Indian
intellectual capital is so admired worldwide has a lot
to do with the success of NRIs. Not only have Indians
earned accolades for entrepreneurship, Indian doctors,
scientists and engineers have enjoyed a position of
eminence in the countries they have chosen to seek their
fortunes in.
Nevertheless, it is their success
in Silicon Valley that gave India prominence on the
global map. This very success spawned the Indian information-technology (IT)
industry that makes other nations envious of India and
Indians. The brain drain that was so loathed at the end
of the last century has paid rich dividends as the
intellectual capability of Indians has grown. And not
only in matters relating to information technology.
India is now one of the most
preferred sources of outsourcing from low-value-added to high-value-added
services, as well as products. Not only this, between
1999 and 2003, the number of patents granted by the
United States Patent & Trademark Office to Indian
entities increased by 210% to 338.
While the
contribution of NRIs in making the world realize the
potency of even India's indigenous intellectual capital
is slowly being appreciated, things are changing for the
better even in terms of physical capital.
Countrywide data provided by the Indian
government for FDI approvals show the increasingly
important role played by NRIs over the past few years.
As per available information,
NRIs stood fifth on the list (with total intended investment
of Rs110 billion (US$2.4 billion), a little less than
that of Japan at Rs118 billion, with the US at the top with
Rs581 billion) of cumulative FDI approvals for all
countries in India since 1991 (when India's reforms
process started) until 2003.
A subset from
a group of about 20 million individuals (total
estimated number of NRIs) aiming to bring more investments
into India than countries such as Germany, France and the
Netherlands etc can hardly be considered non-reliable.
This figure is all the more creditable because it
excludes large numbers of NRIs who prefer to invest in
India via the Mauritius route to take advantage of a
favorable tax treaty between India and Mauritius. Even
if a third (a modest estimate) of the potential inflow
from Mauritius is attributable to NRIs, their overall
contribution to potential FDI into India would be much
more enviable.
What is more heartening
is that, in recent years, proposed NRI FDI in India
has improved in the face of falling approvals from
major investing countries. For example, while NRIs were ninth
in the list in 2002, they climbed to third in 2003.
And during the first quarter of 2004 (the period for
which current data is available), NRIs topped the list
with proposed investment of Rs3.93 billion, ahead of even
Mauritius at Rs3.85 billion.
Even in terms
of remittances, NRIs are a group to beat. For example,
in 2001, India topped the World Bank's list of
workers' remittances at $10 billion, which was more than 13% of the
total $72.3 billion for all developing countries during
2001, according to a World Bank report of 2003. India
was closely followed by Mexico with $9 billion, while
the Philippines received $6.4 billion, Morocco $3.3
billion, Egypt $2.9 billion and Turkey $2.8 billion.
According to a report prepared by
India's Department of Economic Analysis and Policy,
NRI remittances at about $14.8 billion in 2002-03 were
almost 3% of the country's gross domestic product. Over
the years, NRI remittances have helped the country
offset its merchandise trade deficit in a significant
measure, thereby keeping current account deficits at a
modest level through the 1990s and posting modest surpluses
in 2001-02 and 2002-03. Moreover, these remittances
have mirrored the lowest volatility among all categories
of current receipts, after merchandise exports.
Unlike capital flows, interest-rate differentials are not found
to be significant in determining workers' remittances,
thus underlining the stable nature of these flows.
Roll out the red carpet
India's much-liberalized FDI policies have not in the
past left enough room for specific policies for
NRIs vis-a-vis other non-resident investments, except for
the real-estate and civil-aviation sectors, where 100% investment
is allowed only to NRIs. NRIs are also permitted to make
direct investments in proprietary/partnership concerns
in India and also in the shares/debentures of Indian
companies.
But according to
the Financial Express newspaper last weekend, the first-ever union
ministry for NRI affairs will create exclusive economic
zones for NRIs in a major push to attract their
investment, along the lines of economic zones in China.
According to the newspaper, the ministry has
also decided to allow dual citizenship for NRIs.
"The government, after finalizing the plans with
various state governments during the next week, will
come out with a policy framework," Minister of State for
Non-Resident Indians affairs Jagdish Tytler said. "We
will also provide dual citizenship to NRIs in the next
two months," he added.
Based on discussions with
Andhra Pradesh Chief Minister Rajasekhara Reddy, it has
been understood that the state will have the first NRI
economic zones in the country.
The policy
framework will also provide a platform for single-window
clearance. Also, preference will be given to invest in
NRIs' respective states, allowing investments ranging
between $5,000 and $500,000 and above in different
categories. "When Chinese can do proud to their country,
why not Indians?" Tytler said.
NRIs are currently also permitted to
make portfolio investments, ie purchase of shares/debentures
of Indian companies through stock exchanges in India.
These facilities are granted both on a
repatriation and non-repatriation basis. NRI individuals can make
investments in domestic public/private-sector mutual funds or
money-market mutual funds floated by commercial banks
and public/private-sector financial institutions on a
non-repatriation basis.
There is also no ceiling
or restriction on the amount of remittable dividends.
NRIs are also allowed to keep deposits in banks in
India, the salient features of which are: higher
interest rates than banks abroad offer; the interest
earned is non-taxable; the investment, as well as
interest on these deposits, is exempt from Indian wealth
tax, irrespective of the amount. And the principal and
interest can easily be repatriated.
NRI vote
of confidence In a boost for the new Congress-led
government, Indian business leaders working overseas are
"vigorously upbeat" about the Indian economy and voice
strong confidence in the ability of the government to
advance economic liberalization.
A new survey by
McKinsey Quarterly found that 84% of the people
interviewed indicated that they were confident that the
government could continue to liberalize the economy and
manage economic growth effectively.
Such
support, the publication said, was essential if the
government was to move ahead on liberalizing trade and
the rules for foreign direct investment.
The
survey was conducted in May in the aftermath of the
Lower House polls and the defeat of the national
Democratic Alliance government.
Indian executives said they were confident not only about
the government, but also about the Indian economy, with
66% expecting it to be at least moderately better in six
months.
Among respondents from large companies
in the region, 71% saw India as an important source of
talent; globally, 58% of such executives shared that
view, the survey said.
(Copyright 2004 Asia
Times Online Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
