Private Foreign Capital in India during 1948-66

During the colonial period, the action of the State was normally favourable to British capital, and because of this, the latter’s control of the country’s economy was much greater than its numerical strength.

After Independence, much to the disappointment of many, foreign capital did not loose much ground. If anything, there was closer collaboration between Indian and foreign interests as can be seen in various financial, credit and technical agreements signed between the two.

In June, 1948, outstanding foreign business investment in India was of the value of Rs. 264.4 crores. By the end of March 1966, it had reached Rs. 1069.9 crores. Of this, Rs. 633 crores was direct investment and the balance of Rs. 437 crores represented portfolio capital.

The whole of it was not an inflow of cash; rather, a substantial portion was on account of the reinvestment of profits. Even of the fresh inflow, much of the greater part was in the form of non-cash investment, e.g., supply of plant and technical knowledge.

Country-wise, the U.K. was the principal investor accounting for 50.6% of the total foreign investments in the country. The U.S.A. ranked second, her investments constituting 23%, of the total.

Of the rest, Japan accounted for 3.9%, West Germany 3.5%, France 2% Switzerland 2% and international in­stitutions like to I.B.R.D. and I.F.C. 7%. Although, the aggregate investment from other countries was much smaller than that of the U.K. or U.S.A., there was definitely a new diversity in national origins of foreign capital.

Entrepreneurs from Japan, Canada and Western Europe had begun to show interest in the country. The Swiss were particularly active in the chemical industry while the Germans acquired interest in the transport and chemical industries. On the other hand, Canadians centered their investments on the metal product industry like Aluminum.

In the post-Independence period, with the broadening of the industrial base and heavy investment under the Plans, there was a distinct shift in favour of manufacturing and a shift away from the traditional emphasis on Plantations, trading and services.

In 1948, these sectors accounted for 65% of the total foreign investments in India; in 1966, their share had come down to about 33%. Manufac­turing and Petroleum accounted for the remaining 67%.

What is more, a large part of the increase under manufacturing represented manufacturing for the home market. The traditional export bias was no longer so prominently as­sociated with foreign manufacturing investment as a ‘built-in-depresser.’

Of course, up to 1955, much of the increased foreign investment in producer goods production, Petroleum refining, machinery-making, automobile manufacture was based on imported rather than indigenously produced components and materials. In most cases, however, these were the first steps in what Hirschman calls the “backward Linkage” process leading to eventually greater utilisation of indigenous materials.

What could be the reason for this shift in foreign investments? The phenomenon of secular stagnation in world demand for raw-materials could not be the cause of foreign investors’ preference for manufacturing. Such stag­nation should have permanently dried up foreign investment in India rather than shift it to manufacturing for the home market.

The explanation appears to lie in the restrictions on imports and the policy of imports substitution which left no choice for foreign manufacturers but to set up their branches or subsidiaries so as to retain the Indian Market.

In addition, inflationary conditions in the country, a highly protected nature of the domestic market and expanding demand conditions in the field of manufacturing ensured a rate of return which, by any standard, was attractive.

Even within the broad category of manufacturing industries, there was a notice­able change. In 1948, foods, beverages and textile products, having the best domestic growth impact, accounted for 54% of the total foreign investments in manufacturing; in 1966, their share had declined to a bare 15.7%.

Most of the new investment moved into the newer technologically intensive industries and patent protected industries such as the chemicals and Pharmaceuticals or light electrical and engineering goods, machine tools and transport-equipment industries where large profits and an assured internal market exercised a magnetic pull on foreign capital.

In 1966, this sector accounted for 66.4% of foreign investment in manufacturing. However, foreign private investors had little or no stake in capital intensive projects like steel mills, heavy electrical machinery and heavy transport equipment.

Neither the absolute nor the relative size of foreign investments give a correct picture of their true influence which was much greater since foreign monopolies operated in key sectors of the economy, reflected a high degree of concentration of production and capital, controlled considerable amounts of Indian capital, possessed enormous connections and had, at their disposal, the latest technical inventions and engineering personnel. The results speak for themselves.

At the end of 1953, the capital directly controlled by foreign investors was nearly double the amount of actual foreign investments and about 1/2 of the total capital invested in big industry, mining, plantations, banking and big business.

Apart from ex­change banking, tea, jute, cotton textiles, coal mining, match and cigarette industries where foreign capital already enjoyed a commanding position, it managed to entrench itself in certain key and vital sectors of the economy.

Tea machinery, general agricultural machinery, jute mill machinery was foreign controlled and so was an overwhelming proportion of transport ancillaries and components like pistons, fuel injection equipment, sparking plugs, ignition coils, gears etc. Copper refining, lead dressing and Zinc Smelting were foreign monopolies. Even in Aluminium, the largest producer was a foreign controlled company.

Synthetic rubber and paints were also monopolized by foreign firms which also met 3/4 of the demand for rubber tyres. In the chemicals industry, 60% of the dye stuffs demand was met by foreign companies which also enjoyed 9/10 of all patents granted up to 1958 in the Drugs and Pharmaceuticals.

One of the reasons why foreign capital had acquired influence and control over Indian economy far beyond its numerical value was its ‘collaboration’ with Indian capital. The collaboration was either technical or financial.

Foreign capi­tal was thus associated with 45% of consents for new issues in the private sector during the period 1957-63 Financial collaboration was not the only nor perhaps the most important form of collaboration.

While most of the joint ventures provided for some element of technical collaboration, the vast majority was technical collaboration only. On closer scrutiny, even some of the financial collaborations turned out to be no more than technical collaboration agreements with provision for full or part payment in shares.

Under the technical collaboration, the local firm bought knowhow ranging from patents to personnel required to work with the patented techniques. A Reserve Bank’s survey of all public limited companies with foreign capital participation found that of 827 companies in the private sector, as on 31 March, 1964, 591 involved equity participation and 236 were pure technical collaboration companies.

Of the 591 companies, as many as 351 had entered into technical collaboration agreements to purchase know-how from either the parent investors or from other foreign sources. Between 1951-65 as many as 2667 technical col­laboration agreements were approved by the Govt.

Industry-wise, the capital goods and chemical industries were the major absorbers-these together accounted for a little less than 50% of the total agreements, although some of the collaboration cases were approved in soft drinks, ink, ball point pencils, tooth paste and brushes, razor blades, rayon filament and refrigerators.

As for the source of origin, the U.S.A., West Germany, Japan, Italy and Switzerland were the major suppliers of technical knowledge although the U.K. maintained its position as the Chief source.

Foreign collaborators con­tributed foreign resources, technical and managerial know-how and also provided, in some cases, opportunities for Indian capital’s association with attractive projects. It is difficult to measure, quantitatively or qualitatively, the benefit India derived from this collaboration but there is no doubt that many of these agreements were not in the best interests of the country.

Many collaborators took care to see that the import of technology was divorced from the imparting of that technology. Patents and restrictive clauses written in the agreements were used to this end. Certain others supplied only partial technologies and confined fundamental re­search and development to their home friends.

Besides, payments to foreign technicians anywhere between 7-14 times of their immediate and, at times, more skilled Indian subordinates-bred frustration and irresponsibility leading to waste and machinery break-downs.

The feeling spread “After all, they (foreigners) are responsible, let them clear up the mess” Foreign collaborators were permitted, in certain cases, for the production of similar goods in a number of competing units where one or two would have been sufficient.

Over-licensing of this kind contributed not only to larger profits and larger remittances by foreign firms, but also resulted in gross inefficiency in the use of scarce resources. Strangely, some agreements restricted the sale of the product to the Indian market —a stipulation with a clear foreign exchange implication.

In some cases, foreign collaborators tended to inflate the value of their investments by marking up the prices of goods or services supplied as investment in kind. All in all, increasing collaboration, technical as well as financial, worked in favour in increasing foreign control of individual projects involving foreign participation.

The entire issue of the absorption of private foreign investment and know-how was accompanied by a debate. From an economic point of view, the central question is whether the process was beneficial to Indian economic development.

In certain respects, it was for although the volume of foreign private inflow was modest, it did provide an added source of capital for economic development. It also helped, to whatever extent, to utilise technically skilled manpower resources of the country.

The steady indianisation of key positions was also in evidence in most foreign controlled concerns. In 1947, in the Rs. 1000/- a month and above pay bracket, Indians occupied only 7.9% of the vacancies in foreign firms; in 1961, they occupied 70.1%.

Then there were the ‘spread effects.’ Despite instances where only partial technology was supplied or where import of technology was divorced from the imparting of technology, the overall impact could be seen in the application of superior methods of production and the adaption of new business techniques in many spheres of industry.

As against these ‘fringe benefits’, the unimaginative and reckless use of foreign capital and technical know-how spelt perilous repercussions on the balance of payments and domestic effort towards the achievement of the “Take-off”. In this connection, it is well to recall that by no means were all foreign investments placed at India’s disposal in the form of foreign currency.

The major share of these investment corresponded to profits on previous investment which were ploughed back. The original investment was much smaller than the total amount of profits repatriated. Seen from this angle, the situation boils down to the fact that domestic capital formation was decreased rather than increased by the foreign capital.

The use of I.B.R.D. and I.F.C. credits and loans from other official sources mainly assisted those enterprises-which were dominated by or were in contact with foreign capital. These were, therefore, able to expand faster.

This prompted new Indian enterprises to seek foreign aid in order to gain greater facilities. Thus, a powerful machinery was set up to persuade Indian capital to go into association with foreign enterprise —and association all too often meant subor­dination.

How far was the shift in the pattern of foreign investment accompanied by any greater willingness than before to support indigenous private capital or share profits with it? There is no doubt that very little of the increase in foreign business investment went into the sector controlled by Indian private capital.

An additional disadvantage was that foreign collaboration often insisted on the initial purchase of some of the components from their parent organisation. High prices in the domestic market and its sheltered nature left no incentive to the producers to try import substitution.

The initial dependence on foreign com­ponents was allowed to perpetuate with the result that the volume of final output was exposed to the uncertainties of foreign exchange availability.

An instance of this kind was the agreement reached between the State-owned Hindustan Antibiotics and the American firm Merck Sharp Dahme International which stipulated the payment of a certain amount of Dollars per unit of output. It also provided for the concealment of production secrets from Indian personnel. Evi­dently, the gross output was largely made to depend on the Dollar resources of the government.

Inflow of foreign capital normally improves the balance of payments of the receiving country. In India, it worsened the position since 85% of the investment was in kind and only a small portion of this investment represented the inward cash movement from abroad. On the other hand, repatriation of profits was made in foreign currency.

During 1948-49 to 1959-60, the inflow of funds was at the meagre annual rate of Rs. 4.7 crores while the repatriation outflow took place at the rate of Rs. 11.7 crores per year. There was, thus, a net outflow at an average rate of Rs. 7 crores per year thereby adding to the difficult balance of payments position.

Besides, most of the new investment was of the import saving variety and not export-oriented. In fact, even the import-saving investment resulted, in the initial years, in a much larger outlay on imports of raw-materials, intermediates and spares. Therefore, actual saving was, in many cases, negligible or negative.

Whatever contribution foreign controlled firms made to exports came from firms engaged in traditional lines, mostly in the plantation category like jute and tea. It is obvious, therefore, that qualitatively at least, certain foreign investments were harmful on balance.

Unfortunately, in the post-independence India, we were a little too prone to rely on foreign collaboration and a little over- ready to welcome foreign capital just because it was forthcoming.

A chastening of outlook would have, far from slowing down the progress, actually accelerated it and placed it on a surer footing. Abject dependence on foreign sources for doing our part of the job only tended to stifle the ‘upward ferment’ of developmental impulses at all levels.