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CHAPTER IV

DYNAMICS OF POLICY FRAMEWORK CONCERNING

MULTINATIONAL CORPORATIONS IN INDIA

The existence of Multinational Corporations (MNCs) in India is not a recent phenomenon

(Beena et al., 2004; and Belhoste and Grasset, 2008) rather these MNCs marked their

presence in global economy about three centuries ago itself. As far as Indian position is

concerned, 3,799 foreign companies were found to be registered in India by the end of

December, 2012 (Annual Report 2012-13, Ministry of Corporate Affairs, GOI).

Foreign Direct Investment (FDI) is an important constituent of every nation’s efforts

toward its economic development as well as a vital part of the globalization of the world

economy (Festervand, 1999). The historical background of MNCs here can be traced

back to early 1600s, whereby the British rulers entered India through their MNC known

as East India Company during the colonial era. However, except East India Company,

due to lack of clear evidences, it is not possible to draw an exact boundary line in regard

to entry of FDI by these multinational companies in India. Moreover, such outlining

becomes difficult because of the discontinuous nature of the historical data relating to

these MNCs. Except for a limited time period of the pre and post independence era such

as 1948-61, 1961-78 and 1991 onwards, the existing sources of literature are not

sufficient to document the complete history of multinational corporations and FDI in

India. Furthermore, authenticity of data can also not be ensured as data presented with

regard to such FDI by one source do not match with that of another source (Nayak,

2006).

For understanding the historical background of MNCs in India, a division has been made

by discussing the same under two heads namely, pre- independence and post

independence phase.

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4.1 PRE-INDEPENDENCE PHASE

As per Nayak (2006), the period ranging from 1900s-1918 (called as the first phase of pre

independence FDI in India), there were no restrictions on the nature as well as type of

FDI pouring into India. It can be enunciated that majority of these investments were

exploitative in nature and were just concentrating in the sectors such as mining and

extractive industries to suit the general economic interest of Britishers. It is a noticeable

fact that even in the post independence era, a major pie of the FDI source of India

continued to come from the same source. An interesting point is that despite of favorable

environment for free flow of FDI, no other country had shown interest for investing in

India than U.K. and all the foreign direct investments coming to India during that period

were sourced through the Managing Agents from U.K (Beena et al., 2004).

The period from 1919-1947 was the period when the FDI actually originated in India.

This phase can be called as second phase in pre-independence FDI history in India.

Introduction of import duties during this period ‘stimulated’ various British companies to

invest in the manufacturing sector in order to protect their businesses in India. Though

some Japanese companies also enhanced their trade share with India, yet U.K. maintained

its position as most dominant investor in India during this period too.

Though a deep analysis of literature points out that as a characteristic of colonial heritage,

foreign investments in India during this period were concentrated in extractive industries

only; for example, 85 per cent of the tea plantations were foreign-owned. Another area of

concentration of foreign investments during pre-independence period was international

trade and ancillary services.

Another characteristics of foreign capital found in India during this period was their size,

i.e. these foreign companies were the largest and most influential companies in any

industry that they participated in. Kidron (1965) concluded that the average foreign-

owned cotton mill employed 3,300 workers as compared to 1,800 by an Indian-owned

mill. Furthermore, these companies were also handling 39 per cent of India's imports and

between 37 and 44 per cent of India's exports (Bagchi, 1972).

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4.2 POST INDEPENDENCE ERA

Before independence, Indian government was quite comfortable with the “Laissez-

Faire” policy adopted by the earlier British government; therefore, India was not having

any foreign policy of its own. However, after independence, various issues related to

import of foreign capital and its accompanying expertise got attention of the then policy

makers. Therefore, during the post independence era, the Government of India allowed

the operations of the Multinational Corporations on such terms suiting national interest.

A brief examination of the Indian policy framework from a historical perspective carried

out in following analysis will also bring out the role of economic and political exigencies

before the governments at those times. For the first four decades of post independence

era, “self reliance” was viewed as the key objective of the economic policy for every

sector of the economy (Mathur, 2002). This objective was meant to be achieved through

the means such as planning, control and regulation thereby also having its impact on

foreign investment policy (Beena et al., 2004, Sivadasan, 2004).

Along with, policies relating to foreign capital were also affected by some other ancillary

social and political objectives such as redistribution of income and wealth, creation of

employment opportunities, grant of protection and assistance in the development of

small-scale industries and protection of the consumers against private sector monopolies.

Moreover, on the lines of other socialist regimes such as the Soviet Union, policy makers

apparently decided to follow the approach of a “planned economy”. This approach in

turn had its affect on the policy concerning FDI (Sivadasan, 2004), the evidence of which

can be traced from the first policy towards MNCs and FDI announced by the then Prime

Minister Jawaharlal Nehru in April 1949. This policy recognized that foreign private

capital would promote national goals in the overall framework of planned development

with the following two objectives:

(i) to treat foreign direct investment as a medium to acquire modern advanced

technology; and

(ii) to mobilize resources, especially in terms of foreign exchange.

86

With the changing times, the policy of the Indian governments never remained similar

towards the foreign capital but underwent changes in the post independent era (Kumar,

1998). Accordingly, it can be split into four phases. During the first phase of 1960s, these

policies were quite liberal, which turned into stringent in the second phase of 1970s.

However, these were again liberalized in 1980s which is characterized as the third phase

while real liberalization happened in last phase of 1990s. Moreover, the policy

environment during the first phase was characterized by discretionary control and lack of

transparency (Kumar, 1994). These main four phases of the Indian policy framework

concerning MNCs is discussed as under:

4.2.1 Phase I - 1948 - 1966: The Period of “Cautious Welcome Policy”

The first and unique foreign policy of India to deal with incoming foreign direct

investment was pronounced by prime minister Pandit Jawaharlal Nehru at the very dawn

of independence as on 6th April 1949 (Mathur, 1992). Despite of many critics of his

world view, a wide national consensus emerged for his ideas on independent foreign

policy of independent India (Mohan, 2006). Nehru recognized that suspicious attitude

towards foreign capital had to be given up due to the urgent need for accelerated

industrialization and growth. Therefore, the government had to transform its rigid outlook

towards foreign capital. It resulted into Nehru’s statement in parliament that foreign

investment was considered “necessary”, not only to supplement domestic capital but also

to secure scientific, technical and industrial knowledge and capital equipment (Kidron,

1965). Though highly protectionist towards foreign capital, yet the industrial policy

statement of April, 1949 had to relax its restrictions in the form of following promises on

mutually advantageous terms that attracted few multinational corporations to invest in

India:

All undertakings, whether Indian or foreign will have to conform with the general

requirements of the government’s overall industrial policy;

No discrimination will be made by Indian policy makers between the foreign and

the domestic undertakings;

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As far as remittances of profits and repatriation of capital was concerned,

reasonable facilities would be granted to foreign investors as permitted by foreign

exchange position at prevailing time; and

In case a particular industry has to be nationalized; a fair and equitable

compensation would be granted to the foreign investors having a stake in that

undertaking.

By rule, major interest, ownership and effective control of the undertaking will

remain in Indian hands (Indian Investment Centre, 1985).

When industrialization in India was carried out to a satisfactory extent, a new industrial

policy resolution of April 1956 was adopted. This resolution provided for the list of

industries that were made a part of India’s public sector operation without discriminating

between private-domestic and foreign investors. Therefore, foreign capital in India started

venturing through technical collaboration during this period. However, in the year 1957,

foreign exchange crisis and financial resource mobilization crisis for the second five-year

plan (1956-61) led to further liberalization in the government’s attitude towards foreign

investment in the following two ways

(i) A more frequent equity participation was allowed to foreign enterprises; and

(ii) In lieu of royalties and fees, equity capital was accepted in technical collaborations.

Further, a number of tax concessions were granted to foreign enterprises. The licensing

procedure was also simplified to avoid any delays. In addition, double taxation avoidance

agreements were entered into with certain countries such as Finland, France, U.S.A.,

Pakistan, Ceylon, Sweden, Norway, Denmark, Japan and West Germany etc. The Agency

for International Development (AID) investment guarantee was also extended to cover

US private investment in India (Kumar,1998; Chopra,2003). This led to ‘ambitious’

investments by many companies from countries such as U.K. and USA (Nayak, 2006).

Keeping in mind the continued foreign exchange trouble for financing those projects that

were on the completion path during the previous five–year plan, the Government of India

further de-reserved certain industries earlier reserved for public sector for foreign

88

investment in the year 1961. These were industries such as drugs, aluminum, heavy

electrical equipment, fertilizers, synthetic rubber etc (Mathur, 1992; Kumar, 1998;

Chopra, 2003). However, it was mentioned that the proportion of foreign equity would

depend upon the degree of sophistication of technology and the volume of foreign

exchange required at that time. In addition, services of IDBI were also made available for

rupee finance required by these undertakings.

Further, the Finance Act, 1965 also made provision for certain additional tax concessions.

In 1966, wherein the investments by NRIs were allowed without any limit in public

limited industrial concerns in India and for private sectors, this limit was kept up to 49

per cent for private sector.

4.2.2 Phase II- 1967-1979: The Period of “Selective and Restrictive Policy”

The first phase of liberal attitude for foreign direct investment continued till the end of

mid sixties. However, a significant outflow of foreign exchange in the form of

remittances of dividends, profits, royalties and technical fees raised an alarm for the

government. To meet any crisis resulting from foreign economic domination in future,

the government of India rationalized the procedure of inviting foreign collaborations and

their approvals. Therefore, from 1972-73 onwards, the policy of government became

highly selective and restrictive as far as foreign exchange, type of FDI and ownership of

foreign companies in India were concerned.

The government also decided to set up a new agency called Foreign Investment Board

(FIB) in 1968 to deal with all cases involving FDI or collaborations except those in

which total investment in the share capital exceeded 40 per cent. All other cases where

foreign firms held more than 40 per cent equity and Rs. 20 million share capital were

required to be approved by the Cabinet Committee.

A clear cut demarcation was also made by government by classifying all industries in

three parts. The first list covered those industries where no collaboration was considered

necessary. The second list included industries wherein only technical collaboration was

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allowed. The third list dealt with industries wherein foreign investment could be invited

(GoI, 1968). For industries falling in second and third list, permissible range of royalty

payments was kept to be not more than 5 per cent. Moreover, the permissible time

duration for such collaborations was also reduced from 10 to 5 years. In addition,

restrictions on the renewal of agreements were also imposed.

Further in 1973, a group of core industries was specified wherein activities of MNCs and

large industrial houses were sought to be restricted (Mathur, 1989). In 1973, a new

Foreign Exchange Regulation Act, 1973 (popularly known as FERA) came into effect.

FERA was introduced as a cornerstone of Indian regulatory framework to tighten the

scope of FDI regime in India. Its aim was to conserve foreign exchange reserves of the

country in the interest of economic development (FERA, 1973). With the operation of

FERA, all existing companies came under direct control of Reserve Bank of India (RBI).

FERA imposed a general ceiling of 40 per cent on the foreign equity participation in the

country. However, companies working under the core of public sector, tea plantations

and those engaged in manufacturing and employing sophisticated technology or

predominantly producing for exports were allowed to retain 51 per cent to 74 per cent of

foreign equity. As a result, a large number of MNCs diluted their shares to avoid

stipulations posed by FERA and enjoy the benefits of Indianization (Mathur, 2001).

Nearly eighty foreign companies to divested from India during this period (Nayak, 2008).

Further, in 1976, a committee called Technical Evaluation Committee (TEC) was

formed with an objective to assist FIB for screening foreign collaboration proposals and

thereby discussing these with the representatives of various scientific agencies such as

the Council of Scientific and Industrial Research (CSIR) and the Department of

Science and Technology (DST). Moreover, guidelines were also specified for assigning

a primary role to Indian consultants wherever foreign consultants were engaged.

4.2.3 Phase III- 1980-1990: The Period of “Partial Liberalization”

The third phase (1980-1990) can be seen as a new facet in the history of FDI in India.

The overall policy framework for FDI during eighties (especially in 1984-85) became

more liberal. Two main causes were noticed behind such a shift in the policy i.e. second

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oil crisis and failure of India to give a boost to its manufactured exports. This policy

exempted investment proposals received from oil exporting countries accompanied with

technology transfer. However, for 22 industries where indigenous technology was

sufficiently developed, such ban on financial and technical collaborations was maintained

by the government. The main highlights of policy of government of India during this

period were:

Firstly, liberalization of imports of capital goods and technology in order to stress

on promotion of the modernization of the plants and equipments;

Second, gradual reduction in import restrictions and tariffs in order to expose the

Indian economy to competition; and

Thirdly, to assign an important role to multinational corporations for promotion of

export of manufactured goods on a big scale.

In order to facilitate such investments The Reserve Bank of India also simplified

procedural formalities relating to exchange control. The industrial policy statements

issued in 1980 and 1982 pronounced liberalization of licensing rules and regulations.

Along with, a host of incentives and exemptions from foreign equity restrictions to 100

per cent export oriented units were also allowed under FERA. This resulted into

delicensing of 25 industries. Further, the list of items under Open General License

(OGL) was also expanded in order to implement the policies during the early eighties

allowing for the gradual liberalization of imports of raw materials and capital goods. As

a result, nearly 150 items in 1984 and 200 capital goods in 1985 came under OGL.

Moreover, import duties on different type of capital goods were slashed down in 1985.

Furthermore, restrictions on imports and drawings were also removed. In 1980, the

powers were delegated to the administrative ministries to approve foreign

collaborations not having any foreign equity participation and having an outflow of up

to Rs. 50 lakhs in foreign exchange. This outflow limit was further raised to Rs. 1 Crore

in January 1987.

The tax rates on royalties were also slashed from 40 to 30 per cent in 1986. To further

smoothen the progress of the inflow of high technology to existing industry, the

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Cabinet Committee on Economic Affairs (1986) decided to permit the foreign equity

participation even in existing Indian companies employing high technology. The scope

of the technical development fund was also widened to include import of all kinds of

capital equipments, technical know-how and assistance, drawings and design and

consultancy services. The ceiling of this fund was raised to a foreign exchange up to

Rs. 20 million per year. Along with, multiple import applications within a year were

also permitted.

Substantial procedural liberalization in areas such as industrial licensing, procedures for

collaborations, appointment of directors, technicians, visa requirements, custom

procedures, repatriation of funds etc. were also carried out. Investments and

collaborations were also permitted on a selective basis even in the non-manufacturing

and existing companies. New foreign investments in the existing companies were

allowed if the same was justified on grounds of technology exports. Hence, this process

of industrial policy reforms aimed at fostering greater competition, efficiency and

growth in the industry through a stable, pragmatic and non-discriminatory policy for

foreign direct investment. Although, the amount of FDI augmented by over 13 times

during this period, foreign companies invested ‘cautiously’ during this period with an

attitude of wait and watch (Nayak, 2008).

4.2.4 Phase IV- 1991-2001: The Period of “Liberalization and Open Door Policy”

In the early nineties, the balance of payments problem of India had turned quite severe.

Along with, a rapid increase in India's external debt and increasing political uncertainty

made international credit rating agencies to lower both short and long term borrowing

rating of India. This resulted into tough borrowing position in international commercial

markets and outflow of foreign currency deposits by NRI from India. Further, Gulf war

made this situation rather worse and this led to rise in petroleum prices. These

developments made borrowing from IMF inevitable under a standby arrangement.

In addition, since manufacturers were extremely dependent on domestic growth,

therefore there was a dire need to adopt a more outward looking policy for India.

Therefore, at the behest of IMF and World Bank, the new government headed by Mr.

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P.V. Narasimha Rao initiated a programme of macro-economic stabilization and also a

structural adjustment programme. This resulted into liberalization of Economic policies

in order to encourage investment and accelerate economic growth (Beena et al., 2004).

This programme resulted into devaluation of Indian Rupee and announcement of a New

Industrial Policy (NIP).

In spite of these developments, the ideology of Pandit Nehru has also been a challenge

for the Indian leaders to suit the new political environment. The Indian policy makers

could neither denounce Nehru nor formally reject Nehru’s ideas for avoidance of any

kind of serious political troubles. Yet the challenge was to continually cobble together

and refashion India’s foreign policy to suit the new requirements (Mohan, 2009).

The scenario relating to foreign direct investment in India could also not remain

unaltered by these upcoming national developments. In order to stabilize India’s

external sector and to review the declining credit rating of the country, the government

gave a second thought to the foreign investment policy of India. The New industrial

policy and subsequent policy amendments liberalized the industrial policy regime in the

country relating to FDI. For example, the new industrial policy of 1991 abolished the

industrial approval system in all industries except for 18 strategic or environmentally

sensitive industries. Similarly, in 34 high priority industries, FDI was allowed to be

automatically approved after accomplishing certain norms up to 51 per cent.

Furthermore, technology transfer agreements were not required to be essential part of

FDI proposals. Foreign equities up to 51 per cent were allowed for trading companies

primarily engaged in export activities. In order to attract MNCs in energy sector, 100

per cent foreign equity was permitted in the power generation.

Furthermore, multinational companies were also allowed to explore non-associated

natural gas and development of gas fields including laying down pipelines and setting

up Liquefied Petroleum Gas (LPG) projects. A new package was also announced for

100 per cent export-oriented projects and companies. Foreign Investment Promotion

Board (FIPB) was authorized to provide a single window clearance system in the Prime

Minister's office in order to invite and facilitate MNC investment in India.

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For the purpose of expansion in the priority industries, the existing companies were also

allowed to raise their foreign equity levels up to 51 per cent. The use of foreign brand

names for products manufactured in domestic industry (which was earlier restricted) was

also liberalized. India became a signatory to the Convention of the Multilateral

Investment Guarantee Agency (MIGA) for protection of foreign investments.

The Foreign Exchange Regulation Act (FERA), 1973 was revised and earlier restrictions

placed on MNCs in FERA were lifted. As a result, the companies having more than 40

per cent of foreign equity were treated on par with fully Indian-owned companies. New

sectors such as mining, banking, telecommunications, highways construction and

management were thrown open to private as well as foreign owned companies.

These relaxations and policy reforms were accompanied by active courting of foreign

investors at the highest levels. The international trade policy regime was also

considerably liberalized with lower tariffs on various importable goods and negative list

for imports was sharp pruned. The Rupee was also made convertible first on trade

account and finally on current account too. As a result of these changes, the MNCs

from across the globe can enter into India in modes discussed hereunder:

4.2.4.1 Entry Options for Foreign Multinational Companies

A foreign multinational corporation planning to set up its business operations in India

were allowed to enter through the following modes:

As an Incorporated Entity: to become an incorporated entity, Companies Act,

1956 allowed a MNC to operate through:

i. Joint ventures; or

ii. A Wholly Owned Subsidiaries.

Depending on the requirements of the investor and subject to any equity caps

prescribed in respect of the area of activities under the Foreign Direct

Investment (FDI) policy, foreign equity in such companies can be up to 100 per

cent of the total equity.

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As an Unincorporated Entity: alternatively, any foreign multinational

company can enter into business operations in India by opening a:

i. Liaison Office/Representative Office;

ii. Project Office; or

iii. Branch Office.

Such offices of multinational corporations were allowed to undertake activities

permitted under the Foreign Exchange Management Act, 2000.

4.3.4.2 Policy Guidelines for Foreign Investment in India

The new policy guidelines introduced during the post reform era for the foreign

investors include the following:

a) Automatic approval – by the Reserve Bank of India; or

b) Through the Foreign Investment Promotion Board (FIPB).

Automatic approval of Reserve Bank of India was allowed if the FDI in the equity of

corporation does not exceed:

50 per cent in the industries given in annexure III A of the new industrial policy;

51 per cent in the industries given in annexure III B of the new industrial policy;

74 per cent in the industries given in annexure III C of the new industrial policy;

and

100 per cent in the industries given in annexure III D of the new industrial

policy.

In the above cases, the intending company was required only to report to Reserve Bank of

India within 30 days of the receipt of foreign equity/ allotment of the shares. For

proposals failing to qualify automatic approval criteria, approval of FIPB was required

(Reserve Bank of India, Department of Industrial Policy & Promotion, IBEF, 2008). The

sector wise detail of the permitted foreign equity limit is presented in table 4.1:

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TABLE 4.1

GUIDELINES FOR THE ENTRY OF FDI IN VARIOUS SECTORS/ ACTIVITIES

SR.

NO.

SECTOR %age OF FDI CAP/

EQUITY

ENTRY ROUTE

1. AGRICULTURE

1 a) Agriculture & Animal Husbandry

a) Floriculture, Horticulture, and Cultivation of Vegetables & Mushrooms under controlled Conditions

b) Development and production of Seeds and planting material;

c) Animal Husbandry (including of /breeding of dogs), Pisciculture, Aquaculture under controlled conditions; and

d) services related to agro and allied sectors

Note: Besides the above, FDI was

not allowed in any other

agricultural sector/activity

100 Automatic

1 b) Tea Plantation

Tea sector including tea plantations

100 Government

2. INDUSTRY

2 a) MINING

2 aa) Metal ores

Mining and Exploration of metal and non-metal ores including diamond, gold, silver and precious ores but excluding titanium bearing minerals and its ores;

100 Automatic

2 ab) Coal and Lignite 100 Automatic

3. MANUFACTURING

3 a) Manufacture of items reserved for production in Micro and Small Enterprises (MSEs)

Subject to the sectoral caps, entry routes and other relevant sectoral regulations.

4. DEFENCE

4 a) Defense Industry subject to Industrial license under the Industries (Development & Regulation) Act 1951

26 Government

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5. POWER

5 a) Electric Generation, Transmission, Distribution and Trading

5 aa) i) Generation and transmission of electric energy produced in-hydro electric, coal/lignite based thermal, oil based thermal and gas based thermal power plants.

ii) Non-Conventional Energy Generation and Distribution.

iii) Distribution of electric energy to households, industrial, commercial and other users and

iv) Power Trading

100 Automatic

6. SERVICES SECTOR

6 a)

Civil Aviation Sector

The Civil Aviation sector includes Airports, Scheduled and Non-Scheduled domestic passenger airlines, Helicopter services / Seaplane services, Ground Handling Services, Maintenance and

Repair organizations; Flying training institutes; and Technical training institutions.

6 aa) Airports

(a) Greenfield projects 100 Automatic

(b) Existing projects

100 Automatic up to 74 Government route

beyond 74

6 ab)

Air Transport Services

(1) Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline

49% FDI (100 for NRIs)

Automatic

(2) Non-Scheduled Air Transport Service

74% FDI (100 % for NRIs)

Automatic up to 49 Government route beyond 49 and up to 74

(3) Helicopter services/seaplane services requiring DGCA approval

100

Automatic

6 ac)

Other Services under Civil Aviation Sector

(1) Ground Handling Services subject

to sectoral regulations and security clearance

74 % FDI (100 % for NRIs)

Automatic up to 49 Government route beyond 49 and up to 74

(2) Maintenance and Repair organizations; flying training institutes; and technical training

100 Automatic

97

institutions

7. Asset Reconstruction Companies 74% of paid-up capital of ARC

Government

8. Banking

8a) Banking –Private Sector

74 % including investment by FIIs

Automatic up to 49 Government route beyond 49 and up to 74

8 b)

Banking- Public Sector

Banking- Public Sector subject to

Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80. This ceiling (20) is also applicable to the State Bank of India and its associate Banks.

20% (FDI and Portfolio Investment)

Government

9. BROADCASTING

9 a) Terrestrial Broadcasting FM (FM

Radio) subject to such terms and conditions as specified from time to time by Ministry of Information and Broadcasting for grant of permission for setting up of FM Radio Stations

20% (FDI, NRI & PIO investments and portfolio investment)

Government

9 b) Cable Network subject to Cable Television Network Rules, 1994 and other conditions as specified from time to time by Ministry of Information and Broadcasting

49% (FDI, NRI & PIO investments and portfolio investment)

Government

9 c) Direct –to-Home subject to such guidelines/terms and conditions as specified from time to time by Ministry of Information and Broadcasting

49% (FDI, NRI & PIO investments and portfolio investment) Within this limit, FDI component not to exceed 20%

Government

9 d) Headend-in-the-Sky (HITS)

Broadcasting Service refers to the multichannel downlinking and distribution of television programme in C Band or Ku Band

74% (Total direct and indirect foreign investment including portfolio and FDI)

Automatic up to 49% Government route beyond 49% and up to 74%

9 e) Setting up hardware facilities such as up-linking, HUB etc.

(1) Setting up of Up-linking HUB/Teleports

49% (FDI & FII)

Government

(2) Up-linking a Non-News & 100% Government

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Current Affairs TV Channel

(3) Up-linking a News & Current Affairs TV Channel subject to the condition that the portfolio investment from FII/ NRI shall not be “persons acting in concert” with FDI investors, as defined in the SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 1997

26% (FDI & FII)

Government

10 COMMODITY EXCHANGE 49% (FDI & FII)

Government

11. DEVELOPMENT OF TOWNSHIPS,

HOUSING, BUILT-UP INFRASTRUCTURE AND CONSTRUCTION-DEVELOPMENT

PROJECTS

Townships, housing, built-up infrastructure and construction development projects

(which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure)

100 Automatic

12. CREDIT INFORMATION

COMPANIES (CIC)

49% (FDI & FII)

Government

13. INDUSTRIAL PARKS - BOTH

SETTING UP AND ALREADY

ESTABLISHED INDUSTRIAL

PARKS

100 Automatic

14. INSURANCE

26% Automatic

15. INFRASTRUCTURE

Companies in Securities Markets namely, Stock exchanges, Depositories and Clearing Corporations, in compliance with SEBI Regulations

49% (FDI & FII) [FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital ]

Government

99

16. NON-BANKING FINANCE COMPANIES (NBFC)

Foreign investment in NBFC is

allowed under the automatic route in only the following activities:

(i) Merchant Banking

(ii) Under Writing

(iii) Portfolio Management Services

(iv) Investment Advisory Services

(v) Financial Consultancy

(vi) Stock Broking

(vii) Asset Management

(viii) Venture Capital

(ix) Custodian Services

(x) Factoring

(xi) Credit Rating Agencies

(xii) Leasing & Finance

(xiii) Housing Finance

(xiv) Forex Broking

(xv) Credit Card Business

(xvi) Money Changing Business

(xvii) Micro Credit

(xviii) Rural Credit

100 Automatic

17. PETROLEUM & NATURAL GAS SECTOR

Exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products and natural gas, marketing of natural gas and petroleum products, petroleum product pipelines, natural gas/pipelines, LNG Re-gasification infrastructure, market study and formulation and Petroleum refining in the private sector, subject to the existing sectoral policy and regulatory framework

100 Automatic

Petroleum refining by the Public Sector Undertakings (PSU), without any disinvestment or dilution of domestic equity in the existing PSUs.

49 Government

100

18. PRINT MEDIA

Publishing of Newspaper and periodicals dealing with news and current affairs

26% (FDI and

investment by NRIs/PIOs/FII)

Government

Publication of Indian editions of foreign magazines dealing with news and current affairs

26% (FDI and

investment by NRIs/PIOs/FII)

Government

Publishing/printing of Scientific and Technical Magazines/ specialty journals/ periodicals, subject to compliance with the legal framework as applicable and guidelines issued in this regard from time to time by Ministry of Information and Broadcasting.

100

Government

Publication of facsimile edition of foreign newspapers

100 Government

19. SATELLITES – ESTABLISHMENT AND OPERATION

Satellites – Establishment and operation, subject to the sectoral guidelines of Department of Space/ISRO

74% Government

20. TELECOMMUNICATION

(i) Telecom services

74

Automatic up to 49% Government route beyond 49% and up to 74%

(a) ISP with gateways

(b) ISP’s not providing gateways i.e without gate-ways (both for satellite and marine cables)

(c) Radio paging

(d) End-to-End bandwidth

74

Automatic up to 49% Government route beyond 49% and up

to 74%

(a) Infrastructure provider providing dark fibre, right of way, duct space, tower (IP Category I)

(b)Electronic Mail

(c) Voice Mail

100

Automatic up to 49% Government route beyond 49% and up

to 74%

101

21. TRADING

Cash & Carry Wholesale

Trading/ Wholesale Trading

(including sourcing from MSEs)

100 Automatic

E-commerce Activities

Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading

100 Automatic

Test Marketing

of such items for which a company has approval for manufacture, provided such test marketing facility will be for a period of two years,

100 Government

Test Marketing

of such items for which a company has approval for manufacture, provided such test marketing facility will be for a period of two years,

51 Government

Single Brand Retail Trading 100 Government

Multi Brand Product Retail

Trading 51 Government

22. COURIER SERVICES

For carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898.

100 Government

23. PHARMACEUTICALS

23a. Greenfield 100 Automatic

23b. Brownfield 100 Government

24. POWER EXCHANGES

Registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010

49% (FDI & FII)

Government (for FDI)

Source: Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of

India in ‘Consolidated FDI Policy-Effective from April 5, 2013’

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4.3 LEGAL POLICY FRAMEWORK GOVERNING FOREIGN

CAPITAL IN INDIA SINCE INDEPENDENCE

The policy framework in India has almost been same for Indian as well as foreign

private investment. As the motive to regulate foreign direct investment was to ensure

majority control to remain in Indian hands to the maximum extent, therefore, several

legal rules and regulations were implemented from time to time to discourage foreign

ownership in most industries for many years.

Starting from Industrial Policy Regulation, 1948, this framework further included

Industrial (Development and Regulation) Act, 1951 (IDRA), the features of which

had their roots lying in the Second World War period. Similarly, Monopolies and

Restrictive Trade Practices Act, 1969 (MRTPA) was adopted to fulfill the objectives

of the Directive Principles of State Policy as enshrined in the Constitution of India.

Furthermore, to give a boost to the principle of self-reliance, conservation of the

limited foreign exchange reserves, rational utilization of the same and to curb external

liabilities for the coming generations, the Foreign Exchange Regulation Act (FERA)

was also adopted in 1973.

All these acts produced an array of rules and administrative norms that in turn led to

creation of a wide and complex system of controls and procedures involving

extensive delays and uncertainties in new investments. The key policy measures

adopted over the years are summarized in the Table 4.2

The analysis given in Table 4.2 examined the policy framework of the respective

Indian governments towards FDI and MNCs in India during both pre as well as post -

Independence period. In nutshell, the policy framework of FDI and multinationals in

India during the twentieth century can be summarized through a six-stage process i.e.

Free Flow (1900s-1918), Stimulated Flow (1919-1942), Ambitious Flow (1943-1961),

Controlled Flow (1962-1977), Cautious Flow (1978-1990), and Globalized Flow

(1991-2000) (Nayak, 2006).

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TABLE 4.2

LEGAL POLICY FRAMEWORK GOVERNING FOREIGN CAPITAL IN INDIA

a. Companies Act,

1951

Restrictions on the operations of managing agencies that resulted

in affecting functioning of various British companies in India.

b. Industries

(Development &

Regulation) Act,

1951.

To regulate the industrial licenses, With progressive

liberalization and deregulation of the economy the

requirement of industrial licensing have been substantially

reduced. Over the period of time, industrial license for

manufacturing is required only for the following:

i. Industries retained under compulsory licensing;

ii. Manufacture of items reserved for small scale; and

iii. When proposed location attracts location restriction.

c. Corporate Tax

Policies, 1957 to

1991

Corporate tax rates on foreign companies were intentionally

kept about 15 to 20 per cent higher than the rates charged for

large Indian companies for the period 1956 to 1991.

d. Monopolies and

Restrictive Trade

Practices Act,

1969

All applications for obtaining license for companies belonging

to big business houses and subsidiaries of foreign companies

had to be referred to ‘MRTP Commission’, which invited objections and held public hearings before granting a license.

e. Industrial Policy

Statement, 1973

Appendix 1 of the Act, clearly specified the industries where

foreign firms were allowed to operate (generally, these were

industries whose products were not produced in India or

where the domestic sector was being dominated by a single

(usually foreign) company;

f. Foreign

Exchange

Regulation Act,

1973

Hereby, foreign companies operating in India asked to reduce

their share of equity capital invested in any Indian company

to less than 40 per cent, unless they were engaged in specified

‘core’ activities (Appendix I, IPS, 1973), and were using sophisticated technology or had met certain export

commitments (led to the withdrawal and/or sale of various

foreign companies).

g. Amendment to

MRTP Act, 1985

Set a lower limit of Rs 1 billion in assets for referring company

to the MRTP Commission, limiting the applicability of the Act.

h. Foreign

Exchange

Management Act

(FEMA), 1999

Regulates repatriation of capital, profits and dividends etc. and

current account transactions.

Source: Own Compilations from Different Sources.

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The above cited policy initiatives on behalf of policy makers have produced mixed

results. These steps led to very high growth in the amount of inward FDI and the number

of joint ventures. More importantly, FDI has flowed from across the World resulting in a

globalized structure of FDI in India (Nayak, 2008). The process of reforms aim to

sharpen the competitiveness of country's enterprises and to encourage the entry of the

foreign multinational corporations in India due to certain attached benefits, yet in the

current environment of intense competition among developing countries to attract FDI,

just the liberalization of policies may not be adequate. In order to attract a greater

magnitude of export-oriented FDI, India may lure MNCs on account of her large

domestic market, abundant supply of skilled manpower and technical professionals at low

wages.

4.4 PERCEPTION OF MULTINATIONAL CORPORATIONS ON

INDIAN POLICY REFORMS

The process of liberalization initiated during early nineties free market reforms was

expected to give a push to the growth of foreign direct investment in India, however, a

huge gap can still be found in the level of expectation and the actual realization of FDI

even today. Mr Amrit Kiran Singh, Chairman of The American Chamber of Commerce

in India (AMCHAM), while submitting a compendium of position papers on key

industries to the Ministries concerned pointed out that “the poor infrastructure,

belligerent tax administration, fragmented markets, and pragmatic labour laws” remain

major hurdles to FDI. Mr. Singh argued that if these issues are resolved, multinational

companies present in India and those waiting to enter India on introduction of a favorable

policy environment would surely expand their operations in India. Therefore, based on

the analysis of above policy frameworks during various time frames and keeping in mind

the view of various renowned scholars and experts as well as potential investors, a critical

evaluation of existing impediments and remedial measures for the removal of these

hurdles (mutually benefitting) both the stakeholders is discussed in the following

paragraphs:

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4.4.1 Overlapping Central versus State Policies

It has been observed that sometimes the policy and regulations of the centre and state

governments are in conflict with each other which in turn lead to creation of a confusion

among the foreign investors. For example, from June 2007, all foreign direct investments

(FDI) in liquor business have been allowed by Union government through the

“automatic” route by abolition of the licenses earlier required for most manufacturing

businesses in the 1980s. However, in spite of taking this measure, FDI failed to move in

this sector. This happened due to continuance of the prevailing “state” laws which

require licensing as well levying of a tax in the form of excise duty. Therefore, foreign

multinational corporations are still preferring to enter into this business through joint

ventures, partnerships, manufacturing alliances, taking leases from domestic companies,

operating through “work contracts” or by acquiring domestic companies already having

licenses rather than acquiring licenses from government. This was so because, these firms

found the state laws as time consuming, cumbersome and also lacking inter-state

uniformity. Therefore, majority of these companies did not find any sense of the

privileges granted in the form of automatic route of investment provided by the union

government. This problem has also attracted the attention of Federation of Indian

Chamber of Commerce and Industries (FICCI) (Business Line, 2002). Moreover, some

states are also charging hefty amounts for such licenses e.g. Andhra Pradesh is charging

highest license fee of Rs. 2.5 Crore. Therefore, without the coordination of “Union-

State” policies, manufacturing companies will still hesitate to invest in India in spite of its

liberalized regime.

4.4.2 Exorbitantly High Tax Rate Structures

India has one of the highest corporate tax rate structures as compared to other countries in

the Asia- pacific region (KPMG, 2012; ENS Economic Bureau, 2012). India’s tax rates

are not only higher as compared to countries in the Asia-pacific region (see table 4.3), but

also when compared to other nations and economies of the World. In a review of

corporate tax rates at the beginning of 2012 in 92 countries, the average tax rate in the EU

was found to be 24.2 per cent, compared with 27.8 per cent in the OECD countries and

28 per cent in Latin America, whereas India’s tax rate was still hovering around an exorbitantly high of above 40 per cent. (KPMG, 2012).

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TABLE 4.3

TAX RATES FOR ASIA-PACIFIC REGION FOR THE YEAR 2012-13

Sr. No. Country Tax Rates/Slabs

1. Taiwan 0-25%a

2. Indonesia 10-30%

3. Korea 10% - 27.5%b

4. Sri Lanka 35%c

5. Hong Kong 16.5%

6. Singapore 17%

7. Malaysia 5% - 26% d

8. China 17%-25%

9. Vietnam 10%-25%

10. Thailand 30%

11. Japan 40.87%

12. Australia 30%

13. New Zealand 30%

14. Philippines 30%

15. India 41.82% for Foreign Companiese

Source: Own compilations from different sources.

a 0% for NT$50,000 or less; 15% for NT$50,001 - 100,000; 25% for over NT$100,000. An additional 10% on retained earnings kept for more than one year.

b 14.3 per cent for the first 100 million Won of taxable income and 27.5 per cent on taxable income in excess of that (inclusive of the resident tax surcharge of 10 per cent). c Where taxable income is SLR 5 million or less, 15 per cent rate applies. Corporate tax rate is 33 1/3 per cent for quoted public company for the first 5 years and 35 per cent for other companies. Lower rate of 15 per cent also applies to companies engaged in non-traditional exports, agricultural undertakings; promotion of tourism, construction works etc. d For companies with paid-up capital of RM2.5 million or less, 20 per on the first RM500,000 of chargeable income and 28 per cent on any balance in excess of RM500,000. For companies with paid-up capital of more than RM2.5 million, rate will be 28 per cent.

e India is criticized by MNCs for making discrimination between domestic companies and MNCs as far as tax policy is concerned as domestic companies in India are taxed at a lower rate of 33.66 per cent.

107

Moreover, if we compare the policy structure relating to taxation of one of its closest

competitors i.e. China, India lags behind in various policy measures such as:

“Two plus Three" tax holiday for Manufacturing Foreign Investment Enterprises

("FIEs") which implies that a Tax holiday for all manufacturing FIEs starting with

an initial two-year exemption followed by 50 per cent reduction in tax rate for

three years, beginning from the first profitable year after adjusting for tax losses;

Attractive tax rate of 15 per cent tax rate in Special Economic Zones; 24 per cent

tax rate in certain coastal cities;

Foreign investor reinvesting its share of profits for at least five years to get a 40

per cent refund of tax paid on sum reinvested (such refund may be granted up to

100 per cent if such reinvestment is made in advanced technology industries or

export oriented enterprises;)

For high tech FIEs, a three-year tax holiday extension is applicable. In addition,

these High Tech FIEs will be taxed at a “reduced” rate of 15 per cent to 20 per

cent;

Extended 50 per cent tax rate reduction for export oriented FIEs;

Preferential tax rates of 15 per cent and 24 per cent if investment is made in

“certain” regions; and

Dividends repatriated to foreign investors by FIEs with at least 25 per cent

registered capital held by foreign shareholders are exempted. However, these

dividends are subject to tax in Indian case.

The comparison of Indian tax rates with rest of the world clearly shows that India needs

to review its policy concerning taxes of multinational corporations. Kelkar Committee

recommendations pointed out that in future India should bring down its tax rates to

compete with other nations in order to attract FDI in the priority sectors. Efforts should

be made to amend the tax laws by incorporating newer and uncomplicated provisions

such as reduced tax rates on profits, tax holidays, accounting rules allowing for

accelerated depreciation and loss carry forwards for tax purposes and reduced tariffs on

imported equipments and raw materials etc.

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4.4.3 Lack of Developed Infrastructure

Extensive and efficient infrastructure is an essential driver of competitiveness. It is

critical for ensuring the effective functioning of the economy, as it is an important factor

determining the location of economic activity and the kinds of activities or sectors that

can develop in a particular economy (Global Competitiveness Report, 2012). However,

as far as India is concerned, existence of the state-controlled physical infrastructure is

often considered as the weakest link as well as major impediment to MNCs entry (Sheel,

2001) especially in the manufacturing sector. A survey conducted by FICCI, roughly 43

per cent of the respondents regarded India’s ports and airport facilities as substandard as

compared to international standards. Moreover, investors also remained concerned with

the lack of improvement in other infrastructural facilities such as transport, roads, power

and water availability also. However, infrastructural factor is an important decider in

choice of MNCs for starting their operations at state level (Badale, 1998). States such as

Gujarat, Maharashtra, Karnataka, Tamil Naidu and Andhra Pradesh etc. are receiving a

major pie in the share of FDI (Department of Industrial Policy & Promotion, 2012) as

compared to other states that lag behind in infrastructural facilities. Therefore, policy

relating to infrastructure definitely requires an immediate attention of the policy makers.

4.4.4 Corruption

Kumar (2000) observes that a combination of legal hurdles, lack of institutional reforms,

bureaucratic decision-making and the allegations of corruption at the top level have

dragged foreign investors away from India. Treadgold (1998) also pointed out that

foreign investors find it difficult to cut a path through the paper work of overlapping

government agencies. The gigantic bureaucratic structure has created a fertile ground for

corruption. Moreover, most of foreign investors have become apprehensive of the

country's past record of discrimination against foreign multinational companies and

India’s prior reputation of a slow, difficult, bureaucracy ridden environment to do

business (Teisch and Stoever, 1999). This is evidenced by the facts of Transparency

International, a global civil society organization which ranked India at a far away position

as compared to other Asia-Pacific countries (refer to table 4.4) in the perception of

corruption scenario by the potential investors looking for a destination to invest. The

Corruption Perception Index, 2012 is presented in table 4.4

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TABLE 4.4

CORRUPTION PERCEPTION INDEX, 2008-2012

Sr. No. Country Rank in Corruption Perception

Indexf, 2012

1. New Zealand 01

2. Singapore 05

3. Australia 07

4. Hog Kong 14

5. Japan 17

6. Taiwan 37

7. Korea 45

8. Malaysia 54

9. China 80

10. Thailand 88

11. India 94

12. Sri Lanka 79

13. Viet Nam 123

14. Indonesia 118

15. Philippines 105

Source: Own Compilations from Corruption Perceptions Index, 2012, Transparency

International.

4.4.5 Political Instability

The foreign investors perceive Indian political environment to be inharmonious and

peevish for creating an amicable atmosphere for foreign investment (Kapur and

Ramamurti, 2001). Foreign investors hesitate to invest in India due to the political

f Corruption Perception Index ranks countries in the ascending order starting from giving number “1” rank to the “Least Corrupt Country” as perceived by investors.

110

instability that in turn results in to instable policies coming in frequently and without

expectations. Moreover, the multiplicity of regional political parties results into a clear

majority at the centre level forming shaky and insecure coalition governments. For

example, there were four general elections and six prime ministers a few years back. In

such an environment, much required economic reforms turn out to be sluggish as well as

inadequate. Instead of opting for a clear and stable attitude towards reforms easing

foreign investment, governments are repeatedly concerned with diluting the reforms in

order to keep their coalition partners on board (Kripalani, 1999).

4.4.6 Inflexible Labour Laws

Global Competitive Report, 2012-13 ranked India much behind (see table 4.5) in terms of

labor market flexibility. The causes of such inflexibility are rooted in the laws and

regulations prevailing in India. As labor laws are quite stringent in India as compared to

other countries, MNC employers are generally discouraged to give a boost to labor hiring

due to the inflexibility brought out by Indian laws and regulations during cyclical

downturns. As a result, these companies are abandoned from closing down their

inefficient and unprofitable businesses.

Srinivasan (2000) considered some of the Indian labor laws as extremely outdated, rigid

and inadequate, particularly Contract Labour (Regulation & Abolition) act 1948;

Industrial Disputes Act, 1947; Minimum Wages Act 1948; Workmen's Compensation

Act, 1923; Employees' Provident Funds and Miscellaneous Provisions Act, 1952; ESI

Act 1948 and Factories Act 1948. The main problems identified in these acts include

cumbersome exit procedures, maintenance of on site records and myriad inspections etc.

Ramamurthi (2000) considers lack of an exit policy as one of the biggest impediments to

privatization in India i.e. policy to govern the dismissal of redundant workers. The

existing Indian labor laws forbid layoffs of workers for any reason (Kripalani, 1998).

These laws protect the workers and prohibit any legitimate attempts to restructure

business. Further, to retrench surplus workers, firms require approval from both

employees and state governments-approval which is rarely given (Kripalani, 2000).

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TABLE 4.5

LABOR MARKET EFFICIENCY RANK

Sr.

No. Country

Labor Market Efficiency Rank

2012-13

1. Singapore 2

2. Hog Kong 3

3. Australia 42

4. New Zealand 9

5. Japan 20

6. Thailand 76

7. Malaysia 24

8. Taiwan 22

9. Korea 73

10. Indonesia 120

11. Viet Nam 51

12. China 41

13. India 82

14. Philippines 103

15. Sri Lanka 129

Source: Global Competitiveness Index, 2012-13

4.4.7 Government Ceiling on Foreign Ownership

United States companies represented by American Chamber of Commerce (AmCham)

have cited ceiling on foreign ownership by the policy makers as the major hindrance of

Indian policy. As per AmCham, due to the barriers to FDI, India is able to attract only $5

billion from the Untied States, whereas at the same tine China grabs about $60 billion

(Business Line, 2006). These companies wish that the policy makers should remove the

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limit on foreign ownership that effectively prevents foreign control of Indian businesses

(Piggott, 2003).

4.4.8 The Excessively Rigid Role of RBI

The foreign investors blame Reserve Bank of India (RBI) for the slower inflow of FDI in

India due to various reasons such as (i) excessive rigidity in granting permissions; (ii)

delay in allowing authorization for outward remittances; and (iii) problems with

downstream investment facility under automatic route and (iv) denial of permission for

risk payment to foreign bank branch overseas (Srinivasan, 2000).

4.5 SUGGESTIONS CONCERNING POLICY FRAMEWORK

RELATING TO MNCs

The critical analysis of the policy measures introduced during the post reforms period

leads to the conclusion that much more remains to be implemented in order to improve

the consistency in policy making and executing, improving quality of governance and

overall regulatory framework as well. This is particularly imperative in the case of

foreign investments coming in sectors such as infrastructure that are evidently critical for

overall growth and development of India in the years to come. However, in spite of this,

the policy makers need to deal fairly with the decision to open up various sectors for

MNCs in India. In the light of this analysis, following suggestions are made for the

considerations of the policy makers in future:

The industrial policy statement of 1990 is ambiguous with regard to foreign

investment and technology. It fails to understand the likely impact of foreign

investment on balance of payments, self-reliance, indigenous R&D, employment

and India’s stand on MNCs etc. However, the policy statement should have been

very clear of these issues.

The rationale for various countries to restrict FDI is to avoid the risk of foreign

multinational corporations to out-compete the domestic corporations and

enterprises. However, government should undertake a careful sectoral analysis for

identification of the sectors where domestic players are unable to furnish the

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needs of growing domestic as well as export demand for goods and services or

those do not inhibit the necessary ability or capacity to provide the required

quality standards. This will not only result into bringing the investment into those

sectors but also arousal of the sense of competition and generation of spilloversg

to the domestic players that will ultimately lead to benefiting the domestic

economy to grow in the long run.

As policy makers are interested in development of infrastructure for both

domestic and foreign interests, therefore, consideration is being given to

involvement of foreign players in creation of these facilities. Even state

governments are ready to welcoming infrastructural projects such as roads, rural

electrification, and power generation and transmission (Pathak et al., 2000).

However, care must be taken to deal with the entry and extent of investment by

MNCs in certain complex sectors in order to prevent monopolies in public utilities

to foreign firms. Liberalization of Indian economy needs to be a very cautious and

balanced liberalization instead of a “rushed liberalization”.

As it is difficult to assess the impact of liberalization in a particular industry

employing a large number of unskilled people, therefore, in such cases, it

becomes imperative to carry out an in-depth scrutinization of policy prior to take

a decision on allowing the multinational corporations in such sectors.

The policy statement must be more analytical of foreign investment as if MNCs

are given an entry in a rushed manner as a key to the problems such as foreign

exchange, inflation, unemployment, then the policy makers need to act in a very

g MNCs have both direct as well indirect effects on the economy of the host nations. In a direct manner, MNCs influence by providing benefits such as technology transfer, licensing and exporting thus in turn creating employment and transferring R&D. Besides these direct effects, MNCs also exert certain indirect effects on host countries referred to as spillover effects. The term “spillover” has not been defined aptly in the literature anywhere when referred to MNCs except by a few researchers such as Globerman(1979), Blomstrom and Kokko (1993) and Meyer (2003). In their view, spillovers are said to take place when the firm-specific assets of the advantages of the company can not be fully internalized, thus making the uncompensated benefits to leak from these MNCs to domestic companies, customers as well as suppliers in the host nation. In other words, the spillovers exist when “The MNCs cannot reap all the productivity or efficiency benefits that follow in the host country's domestic firms as a result of the entry or presence of MNC affiliates.”

114

cautious manner. This is so because, the prime motive of any multinational, be it

Indian or foreign is always profit not society.

Policy efforts may be made to invite MNCs in the sectors where India wishes to

augment its exports. This objective will be mutually advantageous to Indian

economy as well as MNCs. Export objective is commensurate with the MNCs

objective of profit-maximization. At the same time, exports will result into

generation of foreign exchange earnings. This foreign exchange can be further

utilized to import capital equipments for growth and development of other sectors.

Policy efforts must be directed to encourage MNCs to invest in agricultural

sector. This is because; majority of Indian population is dependent for their living

on agriculture. However, due to lack of investment, productivity in this sector has

remained quite low. Encouraging foreign investment in this sector will not give a

push to its productivity but also lead to creation of employment and economic

development in rural India. Further, if policy efforts are made to set up ties

between domestic companies, then it will again lead to spillover benefits to the

domestic companies in the long run. Investment in food processing industries

could be one such area.

An attempt must be made to identify the sectors where investment by MNCs will

lead to realization of economies of scale which domestic firms are unable to carry

out due to lack of capital and technological know-how. This will result in

effective capacity utilization of those sectors. Moreover, this will also lead to

reduction in prices of goods for domestic customers and enhancing of volume of

exports due to lower costs.