1 FDI: Towards Economic Growth

‘FDI: Towards Economic Growth’

By: Prathmesh Galphade (Bhusawal Arts, Science and P.O. Nahata Commerce College)

What is FDI?

According to Investopedia, A foreign direct investment (FDI) is a purchase of an interest in a company by a company or an investor located outside its borders.

In the Context of India, when a company located outside of India invests money in India it is called FDI. There is a difference between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). In FDI, a significant and large amount of direct investment is done either by establishing a subsidiary company, acquisition & merger or by creating a joint venture, whereas FPI is an indirect investment done by purchasing the financial assets of a country through means like Stock Market.

FDI is more favourable to a country as it is long-term and even helps the economy grow, unlikely to FPI where brought assets could be sold off very easily. Example of FDI- The acquisition of Flipkart by Walmart in a $16 billion deal, which granted Walmart a 77% stake in Flipkart.

Example of FPI- Investment is done by foreign companies in the Indian Stock Market.

Green-Field and Brown Field Investments

Green-Field are completely new Investments like the opening of a subsidiary company by a parent company in the country and then building Infrastructure needed to function, on the other hand In Brown-Field Investments the parent company just purchases an existing entity or leases it to save both money and time.

How it helps the economy grow?

FDI helps an Economy grow in many different ways

FDI

Capital Flow Employment Human Resource Development

Economic Growth

Increase in Exports Competiton Creation

FDI brings a lot of capital in the country; when a company invests money in another country it also employs people there, they train the employees and increase their knowledge, capabilities, and skills which leads to Human Resource Development. Also, when the company start manufacturing products and sells them out of the country, it increases the export rate of the country. As the foreign companies enter the market it also creates competition which further leads to the improvement of several domestic entities. These all benefits together in a long term, help the country in economic growth.

Specific Cases of FDI

Out of India

West African country- Togo

Togo is a country located in West Africa, on the Gulf of Guinea. Research by Assiobo Komlan Mawugnon, Fang Qiang on the relationship between Togo’s economic growth and the Foreign Direct Investment sheds light on how FDI helped the country’s economy to grow in the period 1991-2009.

Togo’s GDP in 1991 was 1602.29 million USD which grew to 2854.60 million USD in 2009 which is a 78.15% growth. This growth is seen with respect to the FDI flow in the country which was 6.48 million USD in 1991 which grew to 50.13 million USD in 2009, a 673.61% growth.

Image Source- Refer to reference (1)

The conclusion of the research explicitly mentions that ‘Though FDI exhibited a positive relationship, its contribution to economic growth in Togo during the study period was significant.’ and ‘The study founds that FDI Granger cause GDP for the period 1991-2009. Thus, FDI stimulates GDP.’

In India

Byju’s

Not just India’s but the world's most valuable Ed-tech Startup Byju’s is now valued at over 16 billion USD. Byju’s has now raised over $3B approx. from 41 Investors in different funding rounds, latest in the F-Series where they raised $150 Mn.

Image Source- ET website {refer to reference (2)}

Above you can see a detailed list of lead Investors in Byju’s throughout different years till Mar 2021.

The thing to be highlighted is that from 15 lead investors above (till Mar 2021) only 1 investor, Times Internet Limited is based out of India and all other 14 are based outside of India. Major of the investments done in Byju’s can be categorized in FDI. This shows how FDI helped Byju’s

tremendously to grow over the period. As Byju’s grew, it also employed over 10,000 people (according to Crunchbase), which further lead to economic development.

FDI into Aviation

Many Airlines in Indian Aviation Sector were affected and got closed in the 2010 Decade.

Image Source- Refer to Reference (4)

The biggest upset was Kingfisher Airlines, operated by Vijay Mallya. The second-largest Airline of India, in its prime time, got its license revoked in 2013. When the fall of the Airline was forecasted by the experts of the Airline Industry, many thought, including Vijay Mallya, that the last resort which could save them can be FDI. He consistently went to the government asking for FDI regulations to be changed. In an attempt to save the airline Industry and money of banks, the Government of India in Sep 2012 allowed up to 49% FDI in Scheduled and Non-Scheduled Air Transport Services.

Unfortunately, Kingfisher Airlines, despite the FDI changes, was not saved but other Airlines found their way through this. The first was Jet Airways, which secured Rs. 2060 Crores from Etihad Airways of the United Arab Emirates for 24% stake.

Soon after the changes in FDI regulations, Vistara was founded by Tata Sons and Singapore Airlines as a Joint venture. This was first planned in the mid-1990s but due to regulatory denials the plan was dropped, once again the plan was revived in 2013, and Vistara was launched on 11 August 2004.

Though even Jet Airways saw its end in Apr 2019, FDI helped the company run for at least 6 more years and Vistara is still flying in the air.

Savior of VI

After the rise of Reliance Jio, both Vodafone and Idea were hit hard. In an attempt to survive, both Vodafone and Idea came together to become VI on 31st Aug 2018. Even the merger was not able to save them completely, in the consequent years due to AGR dues from the Department of Telecommunications (DoT), VI found no way other than Supreme Court to get the dues reduced but even that attempt failed.

But now after Centre Government’s steps to save VI, there are signs of VI coming up stronger. One of the benefits and policy change made by the government is 100% FDI in telecom through automatic route.

In the Automatic route of FDI, a company can first raise money and then just inform RBI about it as against the government route in which a nod from the government is required. So, through the Automatic route of FDI in Telecom VI now has significant chances of raising funds and to strive in the very competitive Telecom industry of India.

Though as of now there are no FDI deals made by VI, in the coming time VI may raise a large amount of money, of which FDI will contribute a major part.

FDI in India in 2020-21

India already saw a great improvement in FDI in the last financial year as compared to both its past year FDI and the other world in 2020-21.

Data Source- Refer to reference (5)

This graph clearly shows around an 80% increase in FDI in India from 2014-15 to 2020-21. Even what more highlighting is that in the last financial year 2020-21 the global FDI inflow reduced to $1 Trillion from $1.5 trillion due to a severe hit by Covid-19 whereas India still managed to attract around 9% more FDI than the FY 2019-20.

As Deloitte CEO Punit Renjen said ‘FDI is a key to India’s aspiration to become a USD 5 trillion economy’, it looks like India is on its way to achieving it.

References

1. https://www.pucsp.br/icim/ingles/downloads/papers_2011/part_7/part_7_proc_43.pdf 2. https://economictimes.indiatimes.com/tech/startups/byjus-valuation-tops-15-billion-afterover-1-billion-funding/articleshow/82036545.cms?from=mdr 3. https://www.crunchbase.com/organization/byju-s/company_financials 4. https://www.worldwidejournals.com/paripex/recent_issues_pdf/2014/July/July_2014_14 05422603__44.pdf 5. https://dpiit.gov.in/sites/default/files/FDI_Factsheet_March%2C21.pdf

LOOK-IN CARBON TRACKING & CAPTURING

“A Billion Dollar Eco-Business”

By: Harsh Dev Chaudhary (Ramjas College)

FROM REDUCTION TO CAPTURING

Carbon emissions are minacious for both – our planet and humans. The International Energy Agency’s (IEA) Global Energy Review 2021 estimates that CO2 emissions will increase by almost 5% this year to 33 billion tonnes. The problem with carbon emission is that it leads to rise in global temperature causing irreversible effect on the climate and habitat. The prime reason for carbon emission is the industrial activity (for e.g., production of cement). Over a span of 150 years, it has released roughly 2200 Giga tons of CO2. Their annual contribution stands at 40 Giga tons. In order to keep the global temperature within the limit of 1.5° C as agreed in the Paris Agreement, we cannot emit more than 2620 Giga tons. Doing the math, it seems that we have 10.5 years only to reduce the current level of emissions. In reality, we have less than a decade. Why so? You would be surprised to know that the average piece of furniture (for e.g., sofa or desk chair) contributes to 47 kg of CO2 equivalents. If you consider all the urban and rural households of India having furniture, together they contribute 0.01 Giga tons of CO2**1. It means others are also contributing to fill the gap of 420 Giga tons apart from the industrial activities. Though the world is actively looking towards renewable energy, zero carbon products and judicious use of fossil fuels, it is imperative to note that these are decades-long process and we need rapid and deep solution. These astonishing facts have shifted the focus to carbon capturing, storing and utilizing (CCSU) technologies – a quicker way of reducing carbon footprint.

GOLDEN ECO-OPPORTUNITY

According to the IEA estimates, there is a need to capture 350 million metric ton CO2 every year till 2030 to limit the global temperature to 1.5° C. But we have captured only 35 million tons i.e., less than 1% of total annual emissions. This gap in carbon capturing together with the fact that the number of companies setting net-zero emissions goal has increased to 1500 in September 2020 from 500 at the end of 2019 has created a big brownie opportunity for minting eco-money (i.e., money + better environment). The Carbon Management System market is estimated to be valued at $19.83 billion in 2026. In India, Tata Steel has taken the first mover advantage by setting the first carbon capturing plant. Therefore, it becomes crucial to understand – How exactly this market work? What is the return for tracking and capturing carbon?

1 **This is based on my own calculation based on the ministry’s statistics report given under references.

Available at: https://rjcdu-my.sharepoint.com/:x:/g/personal/180038287_ramjas_edu_du_ac_in/EUhyZKh6RTVKp7LQhUOtFtIBg99PHeFrKfDwrjC-LGFcg?e=54M9VW

Source: CNBC

PROBLEMS OF POTENTIAL CUSTOMERS

The companies with net-zero emissions can achieve it in two ways: ● By reducing use of fossil fuels or ● By funding eco-friendly projects such as tree plantation drives or solar panel installation. Meanwhile, the first way seems distant as 57% of the energy consumption will come from fossil fuels till 2040. Prima facie the second way looks a good offsetting option but it allows the company to function and emit as usual. Moreover, it has been observed that the funded projects are not implemented in spirit and failed to meet the basic criteria of climate integrity. Due to the flexible reporting requirements, majority of the companies don’t track their emissions and implementation of projects. Further, tracking and capturing carbon emissions is strenuous. The reasons could be the complexities and huge cost involved. For e.g., in case of a beverage company (say PepsiCo), it is difficult to measure emission for 1 liter of pepsi. Many companies have scope 3 emissions (for e.g., emissions caused by charging an iphone is a scope 3 emission for Apple) accounting for 7090% of the total emissions which remain untraceable.

In addition to this, the cost of CCSU technologies ranges between $69- $103 per ton making it an unattractive in-house investment despite of the fact that it has the potential to capture up to 90% of the emissions. This problem of companies creates a gold mine for companies exclusively involved in tracking and capturing carbon emissions. Indeed, they have a ready customer base.

WHAT CCSU COMPANIES CAN BRING TO THE TABLE?

Companies dealing in tracking & CCSU technologies could help other companies in five ways: By creating a data basket for a number of different categories of emissions. For e.g., creating a major category of building emissions and dividing it in emissions caused due to AC, electricity, heating and waste. It will give a unit-by-unit picture of emissions and thus companies could prioritize & develop direct solutions. By performing data analytics to assess scope 3 emissions. For e.g., companies like Apple can collaborate with Klima – a company which traces users daily carbon footprint by asking behavioral questions. With this, Apple would not only be able to get the accurate information on emissions rather it can also encourage the consumers to offset their carbon footprint by offering incentives. By allowing them to make comparison of emissions over time and assisting them to set realistic carbon reduction targets and deadlines. By causing the sustainability competition among the companies. For e.g., as companies would be able to assess their emissions with other companies in the same industry, they will strive to achieve lower emissions level.

By assisting them in building customized anti-carbon projects. For e.g., companies can get their projects evaluated in terms of ecological impact and make the necessary modifications to ensure calculated harm.

WHAT DOES THE FUTURE HOLD?

Envisaging that future belongs to sustainable companies, it has forced the companies to pay meticulous attention to their carbon footprint. Companies have started adopting the framework of shared prosperity for healing of both people and planet. Most of the employees are ready to take

the pay cut to work at environmentally responsible company. Gradually the reporting requirements are also getting stringent. Even the investors (for e.g., BlackRock) are preferring environment conscious companies. Soon the carbon accounting would become the buzzword. It is important to understand that climate risk is actually a financial risk which would cause negligent companies in terms of customer retention, employee retention and investors attraction in the times to come. By far, the companies like planA, planetly, Watershed, Persefoni and Emitwise are the only players in this market. There is no doubt about the potential of this market but it needs government and public support. Who else will come up in this market? When we will see eco-marketplace? The answers would appear soon.

References:

1. Wal van Lierop, Forbes, Our Carbon Problem is a Multi-Billion Dollar Opportunity,

Available at: https://www.forbes.com/sites/walvanlierop/2020/02/27/our-carbon-problem-isa-multibillion-dollar-opportunity/?sh=1df83f903649 2. Power Technology, The Cost of Carbon Capture: is it worth incorporating in the energy mix?

Available at: https://www.power-technology.com/features/carbon-capture-cost/ 3. India Brand Equity Foundation, Furniture Market & Opportunities, Available at: https://www.ibef.org/download/Furniture_170708.pdf 4. National Sample Survey Office, Ministry of Statistics and Programme Implementation,

Government of India, Household Consumption of Various Goods and Services in India 20ll12, Available at: http://mospi.nic.in/sites/default/files/publication_reports/Report_no558_rou68_30june14.pdf 5. Energy Live News, Could the real enemy of climate change turn out to be furniture? Available at: https://www.energylivenews.com 6. KPMG International, Carbon footprint stomps on firm value, Available at: https://assets.kpmg/content/dam/kpmg/pdf/2015/09/gvi-carbon-footprint-stomps-value.pdf