💥Join UPSC 2027,2028 Mentorship (August Batch) + XFactor Notes & Microthemes PDF
Talk to Mentor

Civilsdaily

Login

GS Paper: GS3-14.Investment models

  • Foreign direct investment (FDI) in India

    The FDI in India grew by 13% to a record of $49.97 billion in the 2019-20 financial years, according to official data.

    Get aware with the recently updated FDI norms. Key facts mentioned in this newscard can make a direct statement based MCQ in the prelims.

    Ex. FDI source in decreasing order: Singapore – Mauritius – Netherland – Ceyman Islands – Japan – France

    Data on FDI

    • The country had received an FDI of $44.36 billion during April-March 2018-19.
    • The sectors which attracted maximum foreign inflows during 2019-20 include services ($7.85 billion), computer software and hardware ($7.67 billion), telecommunications ($4.44 billion), trading ($4.57 billion), automobile ($2.82 billion), construction ($2 billion), and chemicals ($1 billion).
    • Singapore emerged as the largest source of FDI in India during the last fiscal with $14.67 billion investments.
    • It was followed by Mauritius ($8.24 billion), the Netherlands ($6.5 billion), the U.S. ($4.22 billion), Caymen Islands ($3.7 billion), Japan ($3.22 billion), and France ($1.89 billion).

    What is FDI?

    • An FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
    • It is thus distinguished from a foreign portfolio investment by a notion of direct control.
    • FDI may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.
    • Broadly, FDI includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans”.
    • In a narrow sense, it refers just to building a new facility, and lasting management interest.

    FDI in India

    • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
    • There are two routes by which India gets FDI.

    1) Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.

    2) Government route: Prior approval by the government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate the single-window clearance of FDI application under Approval Route.

    • India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
    • In 2015 India overtook China and the US as the top destination for the Foreign Direct Investment.

    Back2Basics

    Amendment in the FDI Policy for curbing opportunistic takeovers/acquisitions of Indian companies

  • [op-ed of the day] Strategic disinvestment does not deserve the criticism it gets

    Context

    Air India is on the block.

    Why disinvestment is not such a bad idea?

    • Wisdom lies in the use of resources to meet the emergent needs: True wisdom lies in the use of resources, including the so-called “family silver”.
      • To meet emergent needs.
      • As also for better returns.
      • Even individuals and private sector organizations committed to meeting their obligations or optimizing wealth creation take such initiatives routinely.
    • The weakening of Indian economy
      • This fiscal year’s second quarter growth in the gross domestic product (GDP) slipped to 4.5% and the portents of a slowdown have been quite apparent.
      • Private sector investment is sagging. Gross capital formation has dipped.
      • Aggregate demand has contracted.
      • Public sector expenditure is the single engine that’s driving economic growth.
    • Clamour for the government to open its purse and limited fiscal room.
      • Shrunk revenue growth: There is a clamour for the government to open its purse and help out. However, its revenue growth has shrunk.
      • Low direct tax collection: Direct tax collections registered a growth of only a little more than 6%.
      • The cautious approach by the RBI: The Reserve Bank of India has taken a rate cut pause, inter alia, to watch the government’s approach to the fisc.
      • Commitment to low inflation: The political executive seems determined to honour its commitment to low inflation and macroeconomic stability.
      • India facing Hobson’s Choice: India is thus faced with a Hobson’s choice—either to significantly revise its fiscal deficit target or monetize state assets.
    • The liberalized markets and optimizing wealth.
      • Perception in the capital market: Capital markets operate on perceptions. Valuations of public sector enterprises tend to be much lower than those of private sector companies even if their profit numbers are the same.
      • Why should India suffer suboptimal wealth creation?: The liberalized market philosophy that the country has pursued aims at optimizing wealth creation. In case a change in ownership structure can deliver higher wealth, why should Indian society retain the current ownership frame and suffer suboptimal wealth creation?
      • Need to make policies aimed at value creation: Given the limits on India’s resources, it is all the more important to see that policies are geared to ensure that value is created.
      • Stake sales can achieve value creation: For validation of this surmise, look at the rapid rise in the enterprise value of Bharat Petroleum, as indicated by its share price, since the announcement of its strategic disinvestment.
    • Not all private sector companies perform well: In those cases, the losses are not funded by innocent taxpayers.

    Twin angles to welcome strategic disinvestment

    • One: The need for India to invest in fresh asset creation.
    • The fresh asset can be created by way of roads, ports and airports that would result in a cascade effect for the economy’s growth.
    • Two: The optimization of wealth generation from the country’s assets.
      • This, incidentally, will benefit individual shareholders, including employees with shares, who have invested in the equity of listed public-sector companies such as Bharat Petroleum.
      • Energy security of the country not harmed: As there are other state-owned petroleum companies undertaking exactly the same activities, such as refining and marketing crude oil, the sale of one company does not tamper with the energy security of the country.

    Way forward

    • Caution against undervaluation: The government, however, must ensure that it is not taken for a ride. It must make a good judgment of the value of the company it decides to disinvest from and if the market conditions are not favourable for the move it must wait for the opportune moment.
    • Asset creation from the proceeds: Instead of using the proceeds from the disinvestment to fund revenue deficit the proceeds must be utilized strictly for new asset creation.

     

     

  • FDI in coal mining

    The Union Cabinet has approved an ordinance to amend two laws to ease mining rules, enabling foreign direct investment in coal mining.

    About the Ordinance

    • At a Cabinet meeting chaired by PM the ordinance to amend the Mines and Minerals (Development and Regulation) Act, 1957 and the Coal Mines (Special Provisions) Act, 2015 was approved.

    Benefits of the proposed FDI

    • The decision would boost the ease of doing business and increase the growth avenues.
    • The Coal India would be strengthened and the government was aiming at achieving production of one billion tonnes by 2023-2024.
    • The “end-use restrictions” had been done away with allowing “anyone to participate in the auction of coal blocks”.
    • The ordinance would strengthen the auction process of those mines whose leases were expiring on March 31, 2020. Seamless transfer of clearances would also be facilitated.

    Back2Basics

    Foreign Direct Investment (FDI)

    • A FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
    • It is thus distinguished from a foreign portfolio investment by a notion of direct control.
    • FDI are commonly made in open economies that offer a skilled workforce and above-average growth prospects for the investor, as opposed to tightly regulated economies.
    • FDI frequently involves more than just a capital investment. It may include provisions of management or technology as well.

  • Government Owned Contractor Operated (GOCO) Model 

    Indian Army has initiated the process of identifying potential industry partners to implement the Government Owned Contractor Operated (GOCO) model for its base workshops and ordnance depots intended to improve operational efficiency.

    GOCO model

    • The GOCO model was one of the recommendations of the Lt. Gen. DB Shekatkar (Retd.) committee to enhance combat capability and re-balancing defence expenditure.
    • In GOCO model, the assets owned by government will be operated by the private industries.
    • Under the GOCO model, the private companies need not make investments on land, machinery and other support systems.
    • The missions are set by government and the private sectors are given full independence in implementing the missions using their best practices.
    • The main advantage of the model is that the targets are achieved in lesser time frame. Also, it will boost competitiveness among the private entities paving way to newer technologies.

    Who will be eligible under the mode?

    • The service provider should be an Indian registered company with at least 10 years of working experience in related domains and have an average annual turnover of ₹50 crore for each of the last three financial years.

  • PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

    Kelkar Committee Report: Reforming the PPP

    In the Union Budget 2015-16, Finance Minister announced that the PPP mode of infrastructure development has to be revisited, and revitalized. In pursuance of this announcement, a Committee was constituted to look into the issues.

    The proposals include a provision for monetisation of projects, revamp of the model concession agreement and creation of a new institutional mechanism.

    What was committee asked to look into?

    • Review of the experience of PPP Policy.
    • Analyse risks involved in PPP projects in different sectors and suggest optimal risk sharing mechanism.
    • Propose design modifications in PPP based on international best practices and our institutional context.
    • Measure to improve capacity building in govt for effective implementation of the PPP projects.

    Why is there need to reform PPP framework?

    Background: PPP contracts are typically of very high-value, often with huge capital and operating costs.

    • The emergence of risks not foreseen at the time of signing the agreement exposes such projects to potential distress, making them unviable for the developers and prompting demands for a renegotiation of the original terms.

    How to manage risks in PPP projects?

    • Optimal allocation of risks across PPP stakeholders to boost investment.
    • Sector specific model concession pacts to capture interest of all stakeholders.

    What are the design modifications proposed by the committee?

    The Kelkar panel has come out with clear-cut norms on resolving issues and clarifying norms on re-negotiation of contracts.

    • Formulate a national PPP policy and seeking Parliament’s backing for it to be effective.
    • It emphasised upon the need to establish independent sector regulators for faster implementation of infrastructure projects and swifter dispute resolution mechanisms.
    • The report stated that the PPP structure should not be adopted for small projects.
    • It added that the govt should encourage development of airports, ports and railways through PPP, by ensuring easier funding for projects with long gestation periods.

    Let’s take a look at much deeper level about various specific dimensions of PPP framework and panel’s recommendation.

    How to streamline the stalled projects?

    Background: The Ministry of Statistics and Programme Implementation (MOSPI) says that 40% of all central govt infrastructure projects are behind schedule or have overshot their original cost estimates.

    Panel’s view: Follow the example of the Ministry of Road Transport and Highways, and NHAI, which has taken several successful steps in reducing the number of stalled projects in the sector.

    What are the institutions proposed in the report?

    • An Infrastructure PPP Project Review Committee be constituted.
    • It recommends creation of an Infrastructure PPP Adjudication Tribunal.

    How to renegotiate the PPP contracts?

    Background: More than 50% of PPP projects come up for renegotiation.

    The panel has suggested extensive guidelines stipulating the reasons that form the basis for re-negotiation & those that should not be entertained as valid reasons.

    The panel wants full disclosure of few items prior to the renegotiation:

    • Long-term costs
    • Risks and potential benefits
    • Financial implications for the govt

    Panel has suggested formation of an independent body, like a renegotiation commission, which can oversee the renegotiation of model concession agreements across sectors.

    What is panel’s view on Swiss Challenge method?

    Swiss Challenge Method: It is a process of awarding contracts as any person with credentials can submit a development proposal to the govt, which will be made online and a second person can give suggestions to improve and beat that proposal.

    The Panel wants Swiss Challenge method to be actively discouraged.

    Reason: It brings information asymmetries in the procurement process and result in lack of transparency and in the fair and equal treatment of potential bidders in the procurement process.

    Criticism: India’s ambitious plan to build new expressways across the country by adopting the ‘Swiss Challenge’ method has become uncertain.

    Why report calls for changes in anti-corruption law?

    The report calls for promptly amending the Prevention of Corruption Act, 1988

    Reason: To differentiate between genuine errors in decision-making and plain corrupt practices.

    What is panel’s view on 3P India?

    Background: Finance Minister had announced the setting up of 3P India in 2014-15 budget with a corpus of Rs 500 crore.

    The panel wants the revival of a defunct proposal to establish 3P India to support PPP projects. It can function as a centre of excellence, enable research, and review and roll out activities to build capacity

    How to deal with private sector?

    The private sector must be protected against the loss of bargaining power over long time spans. It has asked for comprehensive guidelines to be framed in this regard.

    How to build capacity in PPP projects?

    • Strengthen 3 key pillars of PPP framework – governance, institutions and capacity.
    • Structured capacity building programmes for different stakeholders.
    • A national level institution to back institutional capacity building activities.

    The report pitches for pragmatism, transparency and a business-like attitude for all stakeholders.

    Published with inputs from Pushpendra