The Role of Overseas Capital and MNCs in India's Development | UPSC Mains Essay Preparation PDF Download

The Role of Overseas Capital and MNCs in India's Development

structure

(1) Opening    —    Our urge to industrialize and develop can not be catered to by domestic capital formation alone.

(2) Body    —    Foreign investment

    —    Desirability vs Need

    —    The Prospects

    —    The quality and magnitude of foreign capital that we may import is itself a function of the politico-economic world order

    —    Formation of regional trading block.

(3) Closing    —    Overseas capital and multinational cooperation can play a major role in boosting India's development.

    —    We should open up our economy.

Low level of income and low level of capital accumulation is the Aichelles heel of developing countries like India. Our urge to industrialize and develop cannot be catered to by domestic capital formation alone and they have to depend on overseas capital. Overseas capital can be obtained in either of the three forms : loans, grants and foreign governments or international agencies have to be repaid and serviced in terms of foreign currency which is scarce in any case. Grants do not carry a repayment obligation but they are a very unsure and irregular source of finance.

Foreign investment is generally in the form of private foreign participation in certain sectors of the domestic economy. The main advantage of this source of overseas capital is that generally the foreign investor also brings with him technical expertise, machines, capital goods etc. which are scarce in underdeveloped countries. Multinational Corporations (MNCs) due to their huge industrial and marketing networks accross the globe are the principal players in this arena.

India's experience with the East India Company and memories of the exploitative Raj imbued in us an element of fear and suspicion towards foreign capital. However, the need to develop, the urge to industrialize and the immense potential of MNCs helped us overcome our initial fears and we embarked on the path of liberalization.

The need for overseas capital in the form of foreign investment in India is underscored by the following factors. Firstly, as already mentioned rapid industrialization requires sustained high levels of investment. This in turn requires a high level of savings which is unattainable given the general poverty of the masses. Although the ratio of gross domestic savings to gross domestic product in India is respectable, yet the absolute amount of investment required for rapid all round development far exceeds the absolute savings. Thus, there is a sort of resource gap between savings and investment which has to be filled by foreign capital.

Secondly, external technical assistance which accompanies foreign investment will upgrade our technology to the levels of developed countries by providing expert services, training of local personnel and helping the establishment of new and or development of existing educational research and training institutions. The availability of superior technology will in turn enable us to better utilize our resources.

Thirdly, it has been observed that foreign capital undertakes the risk of investment in the host countries and provides impetus to the process of industrialization. Once the programme of industrialization gets started with the initiative of foreign capital, domestic industrial activity starts picking up as more and more people of the host country enter the industrial field.

Our need of foreign capital and the immense potential of MNCs should not, however, detract us from its attendant disadvantages viz. a large part of the profits are repatriated to the foreign investor. Moreover, if the underdeveloped country in question (i.e. the host country) chooses to depend too much on private foreign investment, It would be at the cost of risking interference in the conduct of its affairs which would be against the long-term interests of the country. This brings us to the question of ‘desirability’ of foreign investment.

Desirability is symbiotically related to ‘need’. Very often we tend to dispense with the need of something which is not desirable. Desirability involves value judgement and depends upon various factors based on the intellect and society of the beholder. Desirability of a thing can be evaluated on the basis of experiences— ours and that of others. As far as our experience are concerned we observe that MNCs have an unassailable position in India. They have exploited their marketing, financial and technological superiorities coupled with product innovation to control the top of our industrial pyramid.

An interesting thing about the operation of MNCs in India is that they have raised a major part of investable resources from within the Indian economy. A study by Sudip Chaudhuri explodes the myth that MNCs bring in large amounts of foreign capital with them. According to his study foreign capital constituted only 5.4% of the financial resources of MNCs  in India. The real position is that MNCs collect most of the capital from within the country itself but repatriate large amounts of the profits to their home countries.

A common form of transactional participation in Indian industry is through entering into collaboration with Indian industrialists which involves sale of technology, as well as use of foreign brand names for the final products. The standing criticism of foreign collaboration in India have been on the following counts. Firstly, a large number of agreements were concluded for the manufacture of non-essential products or products which could 

easily be produced with the help of indigenous technology. Secondly, government permitted ‘multiple collaboration’ i.e. repetitive import of the same or similar technology. This resulted in repetitive payments without adding to the stock of technical knowledge in the country. This multiplicity led to large inventory accumulation and uneconomic locking up of working capital. Thirdly, it is alleged that the terms of agreements were mostly weighed in favour of foreign collaborations and against Indian interests.

The most important criticism related to the presence of various restrictive clauses in the agreements e.g. the technology cannot be passed on to anyone else, (in some cases even after the expiry of the agreement), manufacturing is to be carried out according to the specification of the collaborator and no local adaptations can be made, besides, controls over the pricing and marketing of the products were exercised by requiring that  part of the production was to be sold to the collaborator's subsidiary in India at a fixed commission or that specified firms were to be made the sole selling agents and many other such clauses.

Despite these blemishes in the Indian context one cannot write off the role of foreign capital in economic development. Firstly, because it is supported by theoretically robust moorings and secondly, because of the successful experiences of the Asian Tigers viz South Korea, Hong Kong, Singapore, Malaysia, Taiwan etc. with foreign capital. Their experiences vividly demonstrate the lacunae in our strategy. Clearly we have failed to optimally utilize this instrument of economic growth. Recent policy measures have therefore sought to attract overseas investment in a big way.

The quality and magnitude of foreign capital that we may import is itself a function of the politico-economic world order. The invitation to foreign capital extended by us is fundamentally different from that extended by countries like South Korea, Taiwan etc., a couple of decades ago. This difference arises from the fact that at that time most countries of the world-especially developing countries-swore by ‘protectionism and importsubstitution led growth’. Consequently the MNCs did not really have much of a choice in expanding their network. Naturally, therefore, investment flew to South Korea and other such countries which ‘opened up’. But now the situation is vastly fluid. The Indian invitation has to compete with other more lucrative offers by countries like China, the countries of Eastern Europe besides the over bearing presence of ASEAN countries themselves.

Each of the above mentioned options has its pros and cons and we should keep our options open. The decision we eventually take will of course be dictated by a detailed cost-benefit analysis. At the same time we should keep in mind our strengths which no investor can ignore. We have a sound infrastructure base, cheap labour, world's largest technical manpower, abundant natural resources and above all a broad and deep market waiting to be exploited.

In conclusion we may state that overseas capital and multinational corporations can play a major role in boosting India's development and we have taken a right step in opening up our economy. However, the incentives given recently have yet to outlast their gestation period and in any case their efficacy is burdened by the finding that (i) foreign investment has a tendency towards ‘geographically based clusturing’ and (ii) our own efforts at liberalization are too mild in comparison to other countries sailing towards the same port.

Nevertheless, if we play our cards correctly India will take its appointed place in the World Economy.