Expressing deep concern over the outgo of valuable foreign exchange in the name of royalty and technical fees by multinational corporations (MNCs), the Swadeshi Jagran Manch (SJM) has asked the Indian government to reimpose caps to save valuable foreign exchange.
SJM referred to the decision of Hindustan Unilever Ltd (HUL) to increase royalty payment to their parent company Unilever to 3.45% from 2.65% (that is, an 80bps—basis point—hike) over three years till 2025. "This decision has once again exposed the unethical practice of increasing royalty payment by MNCs, impacting the health of the economy in general and outgo of foreign exchange and ultimate depreciation of the rupee in particular," SJM says.
"It is the considered opinion of Swadeshi Jagran Manch that the cap on royalty, as it existed prior to 2009, was a prudent policy as it helped in keeping outgo of foreign exchange and therefore keeping the current account deficit (CAD) in the balance of payment (BOP) low and therefore reduced requirement of foreign exchange. It is notable that prior to 2009, the outgo of foreign exchange on royalty and technical fees was hardly US$4bn (billion), which has henceforth been increasing in leaps and bounds and has reached more than US$25b by now," says Dr Ashwani Mahajan, national co-convenor of SJM, in a release.
According to SJM, rising royalty and technical fees to foreign companies have been widening the deficit in BOP further. Royalty payment outflows are made by MNCs to their foreign parent or by Indian citizens to foreign entities for the use of property, patent, copyrighted work, licence, or franchise. Royalty and technical fees are one of the many ways in which MNCs extract vast sums of money from developing and underdeveloped economies, it added.
For FY17-18, while FDI (foreign direct investment) inflows accounted for US$60.96bn, SJM says the payments relating to royalty and technical fees amounted to US$20.65bn. "This figure is reaching nearly US$25 billion by now. This shows how benefits of FDI are clearly being negated by the outflow on royalty and technical fees. Moreover, these outgo would continue in future too, even when there are no FDI inflows."
Before 2009, royalty payments were regulated by the Union government and were capped at 8% of exports and 5% of domestic sales in case of technology transfer collaborations. It was fixed at 2% of exports and 1% of domestic sales for trademark or brand name use. This was done as per international standards and practices.
However, SJM alleges that in 2009, the United Progressive Alliance (UPA) government liberalised the FDI policy. It removed the cap and permitted Indian companies to pay their technical collaborators royalties without seeking government approval.
"After lifting the cap on the royalty outflows on account of royalty and fee for technical services, it has been increasing at a very fast pace," SJM alleges.
Under the present circumstance, SJM says it is imperative to keep the acts of foreign companies in discipline, as they have been increasing the outflow of foreign exchange for royalty and technical fees unilaterally after lifting of the cap on it in 2009.
"SJM demands that government re-imposes these 'caps' to save valuable foreign exchange as there is no logic to continue the same. These curbs would help increase the profits of MNCs, mainly in the automobile sector, prevent the depletion of foreign exchange reserves and protect the interest of minority shareholders. It will also increase the revenue of the government, apart from saving valuable foreign exchange," it added.