By Dr. Ashwani Mahajan
According to the recent data released by RBI, during 2011-12, once again NRI remittances have beaten FDI. During 2011-12 NRIs remitted $63.5 billion, whereas total foreign investment into the country was hardly $39.2 billion. FDI of $22 billion and portfolio investment of $17.2 billion made this sum of $39.2 billion. More important than this is the fact that not only quantitatively NRI remittances are more, they are more reliable than foreign investment, as upheavals in foreign investment are normal, whereas NRI remittances have been consistently increasing in leaps and bounds. Thus we can say that NRI remittances are not only much more than receipts from foreign investment; its reliability is also much better.

Foreign Investment
Foreign investment we receive is of two types - one, Foreign Direct Investment (FDI) in which foreign investor purchases shares of a company (directly from the promoters or from the market, with or without their consent) and management is transferred fully or partially. Such investment was also takes form of take-over or merger. 

In addition to this, FDI may also come is now enterprises or projects. We note that between the year 1990 and 2010, whereas a total FDI of $183.6 billion was received $47.6 billion came for Mergers and Amalgamation (M&A) of established Indian companies. Second type of foreign investment is by foreign institutional investors (FDIs) in the form of portfolio investment. These FDIs invest in share and debt markets. Characteristic of such investment is that this investment could be withdrawn at any point of time. Thus, this kind of foreign investment is highly volatile. During the recent meltdown is USA and Europe these FIIs withdrew suddenly and stock markets crashed suddenly, leaving domestic investors in lurch, who lost lakhs of crores of rupees. Further, large scale outflow of foreign exchange, led to the downfall of rupee too.

Outflow of Foreign Exchange
In 1992-93 total outflow of foreign exchange under these heads was $3.8 billion, which increase to $26.1 billion in 2011-12. It may be noted that in 2011-12 we got only US$22 billion as FDI, whereas total gross outflow of foreign exchange in the form of interest, profits, royalties, salaries etc. was $26.1 billion. The most disturbing aspect of the whole thing is that in the process foreigners' dominance over Indian resources has continuously been rising. 

Much of NRI Remittances Stay Forever
Foreign investment is not only volatile, it also leads to foreign dominance over domestic resources. Takeover of established Indian companies by foreigners and transfer of 15 percent shares of big Indian companies into the hands of foreign investors is not a good sign for our economy. Huge transfer of foreign exchange by foreign investors is dangerous. On the other hand, remittances of NRIs not only support our effort to build huge foreign exchange reserve, they do not involve any big liability for the nation. In 1999 foreign exchange liability of NRI deposits, was $13.9 billion, which increased to $46.4 billion by 2011-12; whereas during this period total NRI remittances were $420.5 billion.

Rethinking Needed on Foreign Investment Policy
We can understand that for high-tech industries, we may require foreign investment. However for foreign exchange resources NRI remittances is a much better option. Therefore, we need to give preference to NRI deposits and therefore, we should attract more and more funds from NRIs for the development of the economy and for financing the deficit in balance of payment.

—The author is Associate Professor, Department of Economics, P.G.D.A.V. College (University of Delhi) and can be contacted at ashwanimahajan@rediffmail.com.

December 2012

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