NOTES

january 18, 2014 vol xlix no 3 EPW Economic & Political Weekly 66
FDI in India
Ideas, Interests and Institutional Changes
Sojin Shin
I appreciate Rahul Mukherji, my mentor, for
his support and all my interviewees for sharing
their insight during my eldwork. I also thank
National University of Singapore and TJ Park
Foundation (POSCO Asia Fellowship) for their
research funding.
Sojin Shin (sojin@nus.edu.sg) is a PhD
candidate in South Asian Studies at the
National University of Singapore.
This article examines the pattern
of foreign direct investment
inows in India through three
periods: (1) 1969-75, when the
policy regime was anti-FDI,
(2) 1975-91, when promotion of
FDI was selective, and (3) after
1991, when the policy regime
is pro-FDI. It shows how the
ideas and interests of different
political groups have affected
the institutional changes that
have inuenced FDI inows. It
also suggests that competition
between provincial states has
positively contributed to the
growth of FDI inows since the
economic reforms of 1991.
H
ow do political factors explain the
pattern of foreign direct invest-
ment (FDI) inows in Indian
industry that have shown a steady increase
since the economic reforms of 1991?
Although many students of Indias politi-
cal economy have examined the economic
reforms of 1991 in India, the extensive
literature has overlooked discussion on
foreign capital inows.
1
Some scholars
have partially explored this area (Kohli
1989; Mooij 2005; Tendulkar and Bha-
vani 2007; Panagariya 2008; Mukherji
2009); their interests however have
focused more on the overall transition of
economic reforms and the growth of FDI
inows rather than attention to the
institutional changes inuencing FDI
inows. This article is an attempt to ll
some of the gaps in the challenging
area. For this study, I conducted intensive
eldwork from December 2011 to March
2012. I interviewed some key political
leaders, bureaucrats and industrialists
in India during this period.
Following the historical institutionalist
perspective that emphasises the political
context interacting with economic insti-
tutional change, this article explains the
pattern of FDI inows at the union level.
The political factors addressed here are
competing ideas between foreign capital
supporters and their opponents and con-
icting interests among different indi-
viduals or different groups that have dif-
ferent political and economic interests.
In this regard, I would like to emphasise
competition that has had a signicant role
in producing the pattern of FDI inows in
India. This factor will help us to better
understand the steady rise of FDI inows,
especi ally in the post-reform period after
1991. It will also lead us to realise the
sub- national diversity of capacity among
states in India in attracting FDI inows.
Focusing on these three political factors,
this article will examine the pattern of FDI
inows in India that has gradually
evolved from the period of anti-FDI
inows (1969-75) to selective FDI inows
(1975-91), and nally to pro-FDI inows
(after the economic reforms of 1991).
Anti-FDI Inows, 1969-75
It was during Indira Gandhis leadership
from January 1966 to March 1977 that
foreign private capital was approached
with a more rigorous perspective than in
any other regime. Some institutions were
structured to efciently regulate nan cial
resources, including foreign capital.
Domestic banks were nationa lised in 1969,
the Quantitative Restrictions (QRs) were
strengthened, and the Foreign Exchange
Regulation Act (FERA) (1973) came into
being (Tendulkar and Bhavani 2007).
Such institutional arrangements were
the consequence of the political struggles
of Indira Gandhi against her political
opponents called the Syndicate.
2

A series of political and economic crises
that occurred in this period encouraged
Indira Gandhi to pursue socialist goals.
First, economic instability was obser ved in
the area of foreign aid. The US suspended
its nancial aid to India (and to Pakistan)
in 1965, when the India-Pakistan war
occurred (Frank 2001: 296). In the process
of industrialisation, policymakers empha-
sised the import-substitution industrialisa-
tion (ISI) stra tegy based on heavy industry
for Indias economic development during
this period. At this nascent stage of indus-
trialisation, nancial aid from abroad,
espe cially from the US and international
organisations such as the International
Monetary Fund (IMF) and the World Bank
(WB) was crucial, as it was difcult for
India to mobilise nancial resources from
domestic private capital that was not yet
competitive in the global market. The dif-
culties of nancial aid from abroad thus
meant a heavy blow to Indias economy at
that time (Frankel 2005 (1978): 322-26).
With the pressure of international
organisations, the US forced Indira
Gandhis government to devalue the rupee.
When liberalisation and devaluation
policies were implemented, the left-wing
political parties like the Communist Party
NOTES
Economic & Political Weekly EPW january 18, 2014 vol xlix no 3 67
of India (Marxist) CPI(M) and domestic
private capital strongly oppo sed them.
Opposition from these groups was nomi-
nally based on the idea of swadeshi, but
it was mainly because of their interests
conicting with liberalisation and foreign
capital inows to Indian industry. Espe-
cially, domestic business groups that
were supporting the ISI strategy strongly
opposed devaluation because they had to
buy expensive imports. Opposing devalua-
tion and ination, trade unions organised
bandhs (strikes) in many provincial states
inclu ding West Bengal, Bihar, Odisha,
Kerala, Uttar Pradesh and some others
(ibid).

As a consequence of these bandhs
and continuous political instability, the
Congress Party lost 95 seats in many states
in the fourth general election in Febru-
ary 1967 (Frank 2001: 304). Even though it
could remain in power after the election,
a factional strife within the party intensi-
ed through the party split in 1969.
In such unstable political and eco-
nomic conditions, Indira Gandhis leader-
ship embarked on the nationalisation of
domestic banks in 1969. This bank nation-
alisation aimed at solidifying her political
support from the poor and the left-wing
parties. The political story behind Indira
Gandhis decision is well-described by
I G Patel, who was very close to her and
served as the governor of the Reserve Bank
of India (RBI), in his autobiography (Patel
2002: 135-38). At that time, the newly esta-
blished Banking Department under the
Ministry of Finance (MOF) was entrusted
with the task of management of the nation-
alised banks. Indira Gandhi used the new
presence of the government body as a
means of securing her political support
from the poor. Bank nationalisation was
to be a way to easily manipulate banking
resources in hard times and food scarcity.
Patel also acknowledges the inuence of
political struggle between Indira Gandhi
and her opponents on economic policy
decisions when he states: It is remarkable
how momentous decisions are made in
the heat of political struggle (ibid).
Poor harvests and droughts later
brought food scarcity threatening Indira
Gandhis leadership. External factors
like oil shocks in 1973 and 1974, in addi-
tion, negatively affected Indias economy
by depressing agricultural production
and generating ination (Ahluwalia
1986). Corruption was pervasive among
politicians and bureaucrats, at both the
centre and the states (Kochanek 1987:
1290). Political instability peaked in 1975
when the Allahabad High Court charged
Indira Gandhi with electoral corruption.
Foreign Exchange Regulation
Like bank nationalisation, the enactment
of FERA was also a by-product of her
political struggle, because she had to
enforce discipline by pushing her socia list
goals. The FERA was introduced in line
with the Industries (Development and
Regulation) Act (IDRA) that was enacted
in 1951 for regulating industrial invest-
ments and production. The key point of
this Act was that the centre had a critical
and monopolistic role in activities invol-
ving foreign currency. For example, no
one or none of the state agencies could
participate in any activities regarding
foreign currency, except the RBI, which
was designated as the only authorised
dealer by the centre. It restricted foreign
equity shares in Indian companies to no
more than 40% in domestic companies
under the strict monitoring of the RBI. In
addition, the FERA was in favour of
domestic companies when they bargained
with foreign companies. The enactment of
FERA enhanced the formers bargaining
position because competition among the
multinational corporations (MNCs) for
accessing the Indian market escalated
thr ough the FERA (Encarnation 1989: 118).
The enactment of FERA struck a blow
to domestic private capital as well as
foreign capital. Many companies retain-
ing their foreign share of equity more
than 40% were discriminated against
under the FERA scheme. These compa-
nies had to either reduce the foreign
share to 40% or less, or sell the foreign
promoters shares to Indian industrialists.
This discrimination continued until the
economic refo rms of 1991. Because of
FERA and some other radical measures
that strongly controlled domestic industry,
India under Indira Gandhis leadership
was indeed the most comprehensively
regulated market economy in the world
(Tendulkar and Bhavani 2007: 23).
Likewise, in the area of foreign colla-
boration and its related rules, care
[had] to be taken to ensure that foreign
collaboration is resorted to only for
meeting a critical gap and does not inhi-
bit the maximum utilisation of domestic
know-how and services.
3
As the Fourth
Five-Year Plan puts it:
It [was] necessary to subject every proposal
for foreign collaboration to fairly rigid tests;
even [import of foreign know-how particu-
larly in sophisticated industrial elds], it
would be essential to make simultaneous
efforts for the adaptation of such know-how
through indigenous effort and to improve on
it to avoid the need for future purchase.
4

In order to identify such elds where
foreign collaboration is needed and to
streamline the procedure for acceptance,
the Foreign Investment Board (FIB) was
set up. Unlike todays Foreign Investment
Promotion Board (FIPB) in the MOF that
promotes foreign investment, nonetheless,
the roles of FIB under Indira Gandhis
leadership addressed the control and
regulation of foreign investment.
Selective FDI Inows, 1975-91
Indira Gandhi attempted to neutralise
political and economic threats from her
opponents through the Internal Emer-
gency of 1975. Her leadership
sought to open up channels to key sections of
society notably the middle classes and middle
peasants to enhance cooperation and col-
laboration with the state, as well as to ensure
a more efcient form of resource extraction
(Hewitt 2008: 128).
The Emergency functioned as a means of
centralising and personalising her power
by transforming economic management.
Through the streamlining of industrial
licensing and emphasis on bureaucratic
efciency, the public sector could utilise
its capacity and achieve an increase of
output. In 1976, industrial output grew
by 10% over the total of 1975 (ibid: 129).
Nayar (2006) also observes the economic
transition that occurred in 1975. He argues
that the year 1975 was the initiation of
incipient liberalisation in Indias economy
and the end of the Hindu rate of growth.
The economic transformation towards
liberalisation was affected by intolerable
ination and difculties of obtaining
loans from the IMF.
Deregulation in the private sector sig-
nicantly contributed to further growth
in Indias economy.
NOTES
january 18, 2014 vol xlix no 3 EPW Economic & Political Weekly 68
The economic transition of 1975 also
inuenced the area of foreign investment
in Indian industry. Hewitt (2008) observes
that the Emergency was in fact used to
encourage foreign capital to participate in
Indian industry alth ough its original aims
addressed socialist goals (p 130). By enco-
uraging such participation, Indira Gandhis
leadership promoted production in the
public sector which was unproductive.
Frank (1977) also sees the change of econo-
mic orientation around 1976. As he put it:
(T)he state is being reorganised to serve the
interests of big and foreign capital more ef-
ciently and, relative to other economic sectors
and political interests, more exclusively (p 473).
Why did Indira Gandhis leadership
shift the economic strategies from con-
trolling both domestic and foreign capital
towards dismantling industrial regulations
and promoting the participation of foreign
capital in domestic industry? The strate-
gies seemed the easiest option for it to
mobilise business groups in order to
centralise its power and harness wider
societal collaboration. The business gro ups
welcomed the attempts at deregulation.
Indira Gandhi however failed to mobilise
the poor (who were her initial support
base) successfully after the party split;
she thereby struggled to reproduce cad-
res who could assist her within the rul-
ing party (Hewitt 2008: 131).
Deregulation and encouragement of the
participation of foreign capital in Indian
industry contributed to the increase of the
foreign exchange reserves. They gradually
grew after 1975 and exceeded $11,000
million in 1979 and 1980. The foreign
exchange reserves increased steadily dur-
ing the tenure of the Janata Party govern-
ment that came to power in March 1977.
Interestingly, this did not result from the
benign perspective of policymakers in the
government on the participation of foreign
capital in domestic industry. Morarji
Desai had taken over the prime minister-
ship from Indira Gandhi and H M Patel
became the nance minister. The govern-
ment did not use the handy foreign
exchange reserves even though the
economy recovered on the growth and
ination fronts (Joshi and Little 1991). In
fact, the previous chronic shortage of
foreign exchange strongly affected policy-
makers in the Janata Party government
who adopted a hoarding mentality with
respect to the foreign exchange reserves
(Tendulkar and Bhavani 2007), contrary
to the attitude of policymakers in the east
Asian countries, for example, South Korea.
The Janata governments under Morarji
Desais leadership and then Charan Singhs
leadership attempted structural trans-
formation in the industrial sector, but not
with respect to foreign investment in
that sector. The industrial policy changes
were designed for the partici pation of
non-resident Indians (NRIs) and domes-
tic private capital in Indian industry but
not for foreign capital. Interestingly,
even though key policymakers in the
Ministry of Commerce at that time con-
sidered foreign technology acquisitions
important, they did not pursue any scheme
for promoting foreign investment through
which domestic companies could easily
access advanced technology. The ideo-
logical orientation of the Janata Party in
favour of a self-reliant economy seems to
have inuenced the changes. Besides, the
nationalist wave affected some of the US-
based MNCs such as the Coca-Cola Com-
pany which pulled out of India in 1977.
When Indira Gandhi returned as prime
minister in 1980, industrial deregulation
accelerated. For business groups, the
Monopolies and Restrictive Trade Practices
(MRTP) Act was removed and entry barriers
to the Indian market were reduced. With
an attempt at deregulation, the government
led by Indira Gandhi simplied licensing
procedures. Nonetheless, there were two
limitations in this reform attempt. First,
her perspective on foreign capital did not
change much while she supported the par-
ticipation of domestic private capital in
industry. Second, despite the considerable
streamlining of licensing procedures in
industry, further improvement was nee ded
in reducing the period of time taken for
disposal of applications for the creation of
new capacities, proposals for substantial
expansion, and the production of new
items (GOI 1980). After all, the attempt
at economic reforms under Indira Gandhis
leadership was unsuccessful (Kohli 1989).
Under the Pressure of Crisis
The failure of reforms in promoting the
private sector under Indira Gandhis
leadership, external pressures from the
oil price rise, and the world recession in
the early 1980s again entailed commercial
borrowing rather than foreign investment
(Joshi and Little 1991: 58-62; Ganguly and
Mukherji 2011). Under the pressure of
crises, a benign idea on foreign investment
in comparison with commercial loans
na lly developed in the Congress govern-
ment under Rajiv Gandhis leadership in
the late 1980s. At a national conference
organised by the Confederation of Engi-
neering Industry (CEI) (predecessor of the
Confederation of Indian Industry (CII)),
Rajiv Gandhi (1988) pointed to the rela-
tive lack of FDI in the Indian economy
and the potential benets that can be
reaped by promoting such investment:
Our policy towards foreign investment is clear.
It is not an open door policy. We permit foreign
investment on our terms, in a wide range of
sectors within certain percentages of foreign
equity. These percentages can be relaxed in
areas of high technology, or where there is a
special contribution to exports. This basic
policy is sound and does not need any change.
Yet the actual inow of direct investment into
our economy is minuscule compared to inows
into other developing countries. Foreign
investment in the ASEAN countries is around
Rs 1,500 crore per year. Foreign investment
in socialist China is about Rs 2,000 crore per
year. Foreign investment in India is only
about Rs 100 crore. The external borrowing
has expanded over the past several years,
reecting our growing needs and absorptive
capability. But the ow of direct investment
has remained very small. Yet direct invest-
ment has some advantages over loans. Loans
have to be repaid whether investments are
productive or not. Investment leads to out-
ows only after there is production and
then too only when there is protWe can
absorb a larger ow of foreign investment, with
advantage to our economy, by speeding up
procedures and removing unnecessary irritants
(emphasis mine).
Two factors seem to have led Rajiv
Gandhi to support FDI inows. First, his
visit to Japan offered a chance to learn
from that countrys developmental expe-
rience.
5
Through this learning, he con-
rmed his belief in the signicance of
technology and a close tie between the
state and industry in the process of eco-
nomic development. He knew that for-
eign investment is the easiest way for
domestic industry to access advanced
technology. Second, his benign perspec-
tive on foreign capital was moreover
encouraged by the difculties of han-
dling external commercial borrowing.
NOTES
Economic & Political Weekly EPW january 18, 2014 vol xlix no 3 69
The question was about devising indus-
trial strategies in India in a way to make
the relation between the state and
industry more cooperative. Nonetheless,
Rajiv Gandhi failed to open the Indian
market to foreign investors. This was
because domestic capital lobbied strongly
for protection from foreign capital.
Pro-FDI Inows, 1991 Onwards
The nancial difculties in the early
1990s brought new economic policies
on the agenda, especially in the area of
foreign investment. First, Montek Singh
Ahluwalia condentially submitted a new
policy paper titled Towards Restructur-
ing Industrial, Trade and Fiscal Policies to
the prime ministers ofce (PMO) in 1990.
6

The paper, in fact, became the original
design for the economic reforms that were
implemen ted in 1991. It suggested the
thorough deregulation of the industrial
sector, including foreign investment. For
example, it contained a scheme to incre ase
the equity of foreign investors from 40%
to 51% of the paid-up capital in domestic
companies in many sectors. Through this
scheme, foreign capital could actively
parti cipate in the process of industriali-
sation in India. Second, the Union Budget
1991-92 also showed the need of foreign
investment. In his budget speech, Man-
mohan Singh, who succeeded Yashwant
Sinha as the nance minister, strongly
supported FDI inows (GOI 1991a: 5). He
believed that FDI inows would provide
access to capital and technology that
could contribute to economic growth.
The imminent threat of a BOP crisis
and the consensus of key policymakers
for liberalisation led to the opening of
Indias economy to foreign capital. Since
the extensive economic reforms of 1991,
total FDI inows have steadily increased.
Interestingly, India has outpaced China
since 2006 in terms of FDI inows as a
proportion of gross xed capital formation
(Table 1). This means that FDI inows in
India have played a more important role
in capital formation compared to China
in recent years. Through the reforms of
1991, foreign capital could participate
in the process of Indias industrialisation
comparatively more easily than before
by enhancing its equity up to 51% in
domestic companies in many sectors.
When the plan for economic reforms
was unveiled in 1991, there were conict-
ing opinions. Many policymakers stro ngly
supported the so-called Montek paper
that outlined a comprehensive economic
vision for both Indian industry and
international relations.
7
However, some
key bureaucrats critically pointed to the
feeble position of the Indian state in
pursuing the reforms against the power
of vested interests such as rich farmers,
business groups, and trade uni ons. Dhar
(1990), a former principal secretary to
the prime minister when Indira Gandhi
was in ofce, and an assistant secretary
general of the United Nations, was one
of them. He was concerned about what
could happen to economic policies at a
time when there was pervasive political
fragmentation within a political party.
His comment on this is noteworthy: In
circumstances of poli tical fragmentation
economic policies are political weapons
in power struggles rather than solutions
to problems (p 26).
Political fragmentation and the power of
vested interests in fact strongly disturbed
the progress of the economic reforms of
1991. The rst response from Indian
society to the reform plan came from
domestic big business. Some dominant
business associations expressed diffe rent
opinions. The Associated Chambers of
Commerce & Industry (ASSOCHAM) argued
in favour of the need for free ow of
foreign investment while the Federation
of Indian Chambers of Commerce and
Industry (FICCI) opposed the liberalisation
of FDI policy. The FICCI, whose member-
ship is dominated by the indigenous busi-
ness groups, felt that the nal judgment
on whether or not such investment is
desirable should be left to the Indian
entrepreneurs.
8
A similar view in strongly
opposing foreign investment was again
observed after a few years when a BJP-led
government under Atal Bihari Vajpayee
attempted economic reforms in 1998,
although FICCI now laid emphasis on
sector-wise issues.
As another example of how the interest
of domestic big business inuenced the
reform process, the Bombay Clubs
swadeshi debates should not be missed.
The Bombay Club (this is more of a sym-
bolic term rather than a genuine one,
indicating a section of Indian big business
represented by the Bajaj, Birla, Thapar,
Modi, Godrej, Singhania and some others)
led by Rahul Bajaj, chairman and manag-
ing director of Bajaj Auto, was unhappy
with the deepened competition with for-
eign capital as the result of the reforms
(Chibber 2003). Centring on the CII and
the FICCI, it began to
demand a level playing eld
vis--vis foreign capital in
the Indian market. Its resist-
ance to economic reforms
was strengthened in late
1993 when the economic cri-
sis eased (Kochanek 1987).
While the Bombay Club
was opposing foreign invest-
ment by demanding contin-
ued tariff protection and
internal reforms prior to
opening the domestic market,
competition for lobbying to
pursue their interests among
business associations was
becoming more severe.
Lobbying by the domestic
big business to protect its
business interest against
foreign capital had been
considerable until the BJP-
led National Democratic
Table 1: FDI Inflows to India and China
Year FDI, Net Inflows FDI, Net Inflows As a % of Gross Fixed
(BoP, Current $) (% of GDP) Capital Formation
(Annual Average)
India China India China India China
1991 73,537,638 4,366,000,000 0.0 1.2
1992 276,512,439 11,156,000,000 0.1 2.6
1993 550,370,025 27,515,000,000 0.2 6.2
1994 973,271,469 33,787,000,000 0.3 6.0
1995 2,143,628,110 35,849,200,000 0.6 4.9
1996 2,426,057,022 40,180,000,000 0.6 4.7
1997 3,577,330,042 44,237,000,000 0.8 4.6
1998 2,634,651,658 43,751,000,000 0.6 4.3
1999 2,168,591,054 38,753,000,000 0.5 3.6
2000 3,584,217,307 38,399,300,000 0.8 3.2 1.9* 11.9*
2001 5,471,947,158 44,241,000,000 1.1 3.3 4.7 10.5
2002 5,626,039,508 49,307,976,629 1.1 3.4 4.6 10.4
2003 4,322,747,673 47,076,718,733 0.7 2.9 2.8 8.6
2004 5,771,297,153 54,936,483,255 0.8 2.8 2.7 8.2
2005 7,269,407,226 104,108,693,870 0.9 4.6 2.9 9.2
2006 20,029,119,267 124,082,035,620 2.1 4.6 6.6 6.4
2007 25,227,740,887 156,249,335,200 2.0 4.5 6.3 6.0
2008 43,406,277,076 171,534,650,310 3.5 3.8 9.9 5.8
2009 35,581,372,930 131,057,052,870 2.6 2.6 8.2 4.3
2010 26,502,000,000 243,703,434,560 1.6 4.1 4.4 4.4
2011 32,190,000,000 220,143,285,430 1.7 3.0 6.4 3.7
*Annual average from 1990-2000.
Source: World Development Indicators (various issues), World Investment Report
(various issues).
NOTES
january 18, 2014 vol xlix no 3 EPW Economic & Political Weekly 70
Alliance (NDA) government led by Vajpayee
took ofce. Vajpayees leader ship, espe-
cially in 1998 and 1999, witnessed a vigor-
ous debate on the Bombay Club and its
using the idea of swadeshi in opposing FDI
inows. As swadeshi was also the ideologi-
cal base of the BJP, the voice of domestic
big business in insisting on a level playing
eld was strong. P Chidambaram (2007)
who served as nance minister before the
NDA, for example, expressed his apprehen-
sion about the hostile attitude of Indian big
business towards foreign capital in his
autobiography. As he puts it: Rahul Bajaj
(and what survives of the Bombay Club)
maintains that money has colour. Accord-
ing to him, there is foreign money and
there is Indian money, and the latter has to
be preferred to the former (p 52).
Left- and Right-wing Opposition
The second response from Indian society
to the reforms came from social activists
who spoke for producers in the small
industries, farmers, artisans and con-
sumers. Social activists opposed dom estic
big business when the latter oppo sed the
reforms in the name of a level playing
eld. For them and the poor in society, big
business sought its own prot in the name
of swadeshi. Such a negative response
from society was not only towards
domestic big business but also towards
foreign capital. The response was often
expressed through agitations and attempts
to evict the MNCs. Because of these strong
agitations and political lobbies from
many interest groups in society, many for-
eign investors had to withdraw their
plans to embark on invest ment in India.
Interestingly, such agitations involved
either the left-wing political parties that
made alliances with the victims of the eco-
nomic reforms or extreme right-wing polit-
ical segments that aimed to protect the
interests of domestic companies or indige-
nous groups. Prasenjit Bose, who was the
convenor of the research unit in the CPI(M),
expressed his Partys position as follows:
9

There are two types of anti-FDI pictures from
our perspective. First is a grass-root level
resistance, which is protesting for people
who are displaced from their resources and
livelihood like land. Second is a sector-by-
sector approach at the macro-economic policy
level. We do not oppose the FDI inows of
every sector. We accept that we cannot avoid
globalisation. So we consider the sensitivity
of each sector (for opposing FDI inows).
Despite its nuanced understanding of
the inuence of globalisation in the Indian
market, the left-wing parties like CPI(M)
have had a central role in opposing FDI
inows by organising their trade unions
and opposing the managements of many
foreign companies in Indian industry.
The Rashtriya Swayamsevak Sangh
(RSS), has also opposed globalisation
and FDI inows. The Swadeshi Jagran
Manch (SJM) (self-reliance awa re ness
front) that was organised in 1994 by the
RSS has stronlgy resisted FDI inows
(Frankel 2005 (1978): 728-29). Its oppo-
sition activities were clearly obser ved
especially when Vajpayee was the prime
minister. The SJM often alleged that it
would conduct a social boycott of politi-
cal leaders and bureaucrats who negoti-
ated with the World Trade Organisation
and MNCs, by describing its opposition to
MNCs as the second war of Indias inde-
pendence with a slogan of MNCs quit
India; we wont accept globali sation.
10
Such struggles of foreign investors fac-
ing strong opposition from some sections
of society are still witnessed today in many
states in India, even though economic
institutions are obviously pro-FDI. The
anti-special economic zone movements in
many states, including Tamil Nadu and
Maharashtra, and the anti-Pohang Iron
and Steel Company (POSCO) movement in
Jagatsinghpur (Odisha) are well known.
One noteworthy thing in these agitations
against foreign capital and FDI projects is
that the issues raised and the strategies of
the opposition groups have become more
complicated. The issues have been arti-
culated in terms of livelihood, security and
environment besides the idea of swadeshi.
Another feature of this pro-FDI inows
period is the decreased role of the prime
minister in the process of FDI approval.
Instead, there is greater discretion exer-
cised by the chief ministers of the states
concerned. Compared to other economic
agendas, it is quite interesting to see the
overall reduction of prime ministers role
in the FDI approval process. V S Chauhan,
director of Foreign Investment Promo-
tion Board (FIPB), agreed with this per-
spective to some extent. In the course of
an interview, while stressing the two
different domains of the FDI process, deci-
sion and implementation, he said:
11

When there is no policy, then the decision is
taken at the highest level. When you clearly
demarcate a policy, then you do not need to
involve the PM. You take the PMs approval
only for the change of policy. ... It should be
seen as the steering role of PMO when there
was no clearly articulated policy. [When] the
policy has been articulated, its implementation
has to be left to the administrative ministries.
Why then has the signicance of the
states increased in the process of FDI
inows? The proportion of FDI proposals
that embark upon the automatic route
accounts for around 80% to 90% of all the
proposals.
12
The proposals then have to be
guided by each state where the FDI project
is planned. In cases of FDI proposals that
need to build plants for production (this
is called as the greeneld type of FDI),
each state consults the foreign investors
in order to provide them the necessities,
including land, electri city, water, and
some other infrastructural facilities, for
the establishment of the plants within
the provincial state (GOI 2002).
Interstate Competition
In order to demonstrate better perform-
ance than other states in approving more
FDI projects, competition among fal
states has intensied (FICCI 2012). We
have observed many chief ministers who
accelerate industrialisation in their states.
Chandrababu Naidu in Andhra Pradesh,
Narendra Modi in Gujarat, Jayalalithaa in
Tamil Nadu, and many others in Karnataka,
Odisha, Bihar, and recently in West Bengal
have attempted to promote FDI inows. As
a driving force of deepening competition
among states, not only liberalised ideas
from political leaders but also learning
from neighbouring states strongly works.
Regarding the positive effect of the
deepening of interstate competition in
attracting FDI inows and thereby
catc hing-up, Montek Singh Ahluwalia,
currently serving as the deputy chairman
of the Planning Commission, says:
13

The BIMAR[O]U states, Bihar, Madhya Pradesh,
Rajasthan, UP, and Odisha, if you spell the
bimaru, you should add o for Odisha. Now
look at these states. ...Quite a few of them are
catching up. ...Each state has investment con-
ferences, and images are created. The other
interesting thing is that states are actually
changing the images [as investment-friendly
ones]...maintenance [of good performance] is
NOTES
Economic & Political Weekly EPW january 18, 2014 vol xlix no 3 71
a very big problem... this maintenance should
be the job of all the state governments
charged. The central government helps them
to create capacities and the state governments
maintain their capacities.
Conclusions
This article has explored the dynamic
interaction between politics and institu-
tional changes in the area of FDI inows
in India. Drawing attention to three polit-
ical factors, the article has explained the
pattern of FDI inows in India that had
gradually evolved from the period of anti-
FDI inows (1969-75) to selective FDI
inows (1975-91), and nally to pro-FDI
inows (after the economic reforms of
1991). In the period of anti-FDI inows, the
article has shown that political struggles
between Indira Gandhi and her opponents
(called the Syndicate) within the Congress
Party had a signicant role in structuring
economic rules against foreign capital. In
the period of selective FDI inows, the
need for foreign investment began to be
discussed, especially in some selective
areas where foreign technology was nec-
essary in Indian industry. In this gradual
transformation of patterns, fresh ideas
from key policymakers who recognised
the advantages of FDI over commercial
borrowing played a signicant role. How-
ever, lobbying and interest group politics
involving domestic business groups against
FDI inows hindered the policymakers
from widely opening the domestic market
to foreign capital. But the momentous
transition from selective FDI inows to pro-
FDI inows was driven by the imminent
threat of nancial crisis and the consen-
sus of key policymakers for liberalisation.
Intensied competition between domestic
private capital and foreign capital in
Indian industry and between states has
led businesses to pay attention to social
concerns. The discussion particularly
draws attention to the fact that the states
and their politics have greatly inuenced
FDI inows at the state level. The political
economy of FDI inows across states is
dynamic as it is deeply related to the
complicated issues of coalition politics
between the centre and the states.
Notes
1 Foreign capital is both a political and economic
term in this research, while FDI is an economic
term. Foreign capital is a political class within the
boundary of domestic politics in a foreign
investment-hosting country as well as foreign
currency, especially equity shares, preference
shares, convertible preference shares, and convert-
ible debentures taken by any foreigner or foreign
company in the market of the host country.
2 For the political conicts between Indira
Gandhi and the Syndicate, see Kaviraj (1986);
Frankel (2005 (1978): chapters 7 and 10); Nayar
(2006: 107-34); Mukherji (2007: introduction);
Panagariya (2008: 50-51); Hewitt (2008: 81-82).
3 GoI (1969: Ch 14).
4 Ibid, same chapter.
5 Interestingly, some other political leaders both at
the centre and state levels also visited Japan for
learning the east Asian development strategies in
the 1980s. Their inspirations were in reality
embodied to devise industrial strategies in India
in a way to make the state and industry more
cooperative. For example, MGR (chief minister of
Tamil Nadu at that time) visited Japan with some
of his party members including C Ponnaiyan
(nance minister of Tamil Nadu at that time) in
order to learn about east Asian industrial devel-
opment. Interview with C Ponnaiyan in Chennai
on 31 January 2012. The strategies were outlined
in various government reports issued. See also
Abegglen and Etori (1981) and Sawhney (1985).
6 See Rohini Mohan, The Riddler on the Roof,
Tehelka, 19 May 2012. See also Acharya and
Mohan (2010), accessed on 17 May 2012.
7 See Institute of Economic Growth Delhi, Indus-
trial Policy: A Panel Discussion, New Delhi, 1990.
8 Political Bureau, Industrial Policy to Be
Approved Today, The Hindu, 21 July 1991,
accessed on 15 April 2012.
9 Interview at the head ofce of CPI(M) in Delhi
on 12 and 21 December 2011.
10 See Political Bureau, Swadeshi Manch Plans to
Probe Bureaucrats MNC Links, Business Stand-
ard, 28 February 1997; Rajesh Ramachandran,
Swadeshi Manch Puts Centre, MNCs on
Notice, The Times of India, 29 August 2000,
accessed on 6 June 2012.
11 Interview at MOF in North Block, Delhi on
21 March 2012.
12 Interview with Ashish Kumar (Director of FDI
Asia-Pacic Division) in the Department of
Industrial Policy & Promotion (DIPP) in Udyog
Bhawan, New Delhi on 15 March 2012.
13 Lecture in IIT Delhi on 3 March 2012. See also
Ahluwalia (2000).
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