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Why India lags behind in attracting FDI

S Sivakumar

India's economic reforms have not led to a surge in foreign direct investment. The usual comparison with China is made to demonstrate that India is at least 10 years behind the former in terms of attracting FDI.

This article examines China's success with FDI, India's track record over the last 10 years in the global context, the stumbling blocks and an action plan to invigorate FDI.

China's remarkable success in FDI is awesome. In 1979, FDI in China was non-existent but within a span of 20 years, they were getting an annual FDI of $45 billion.

By offering substantial tax concessions, leasing of land and property, government guarantees for investment and special arrangements regarding retention and repatriation of foreign exchange, China has been able to attract FDI.

An important factor overlooked in comparing India to China is that 80 per cent of the FDI to China comes from Hong Kong, Taiwan, Japan, Korea and Southeast Asian countries.

Most of the investment comes from overseas Chinese who are businessmen and are shifting manufacturing operations to China.

Also, as the World Bank global development finance report points out, a substantial portion of FDI may be round-tripping from China. Chinese residents move money to offshore centres and bring it back as FDI to China.

In 2000, the US accounted for only 11 per cent of the total FDI flows to China, Japan 7 per cent, Germany 3 per cent and France 2 per cent.

However, the critical mass of FDI and economic growth have started attracting multinationals which find a huge market in China.

Hitachi, one of the world's largest transnational corporations, is planning to invest $0.8 billion over the next five years and increase its production in China eightfold by 2005 to $4 billion annually.

Ericsson, the Swedish telecommunications company, plans to double its investment in China. Mexico is being threatened as some of the manufacturing units (Maquiladoras) are shifting to low-cost China.

There is no gainsaying the fact that China is emerging as the manufacturing powerhouse of the world.

The net FDI inflows to developing countries grew at an annual rate of 16.8 per cent per year. FDI flows are expected to grow at the rate of 4 per cent per annum during the period 2001-04.

India gets less than 5 per cent of the FDI flows to developing countries. The resilience of FDI in the 1990s and India's glaring failure warrant introspection. This can change over the next five years.

A very large component of FDI flows has been privatisation and cross-border mergers and acquisitions. These activities will slow down in the future and greenfield investment should pick up.

Given the global uncertainty, India's 5-6 per cent growth rate will attract attention and if we create the right conditions, $15 billion annual FDI can be achieved.

The biggest stumbling block is India's bloated bureaucracy. Approximately only 20 per cent of FDI approvals translate into actual investment. This implies that the initial enthusiasm to invest peters out by the time companies actually go through the process.

Streamlining procedures for FDI approval, such as environmental clearances and legal work, are still time-consuming.

Added to this, there is the political uncertainty at the central and the state levels, and of the Centre-state relations. Infrastructure reforms are moving very slowly.

When Jack Welch inaugurated GE's Excellence centre in Bangalore, the power went off five to six times. Such things do not inspire confidence. There is an urgent need to get an action plan and jumpstart FDI.

Market India: TNCs have been wary of India as they have been waiting on the sidelines and watching how India deals with Enron. At least now, it should be clear that Enron was a mess which got messier in India.

A creative marketing campaign must be implemented to showcase GE's success in India. Jack Welch has praised India in his recent book Straight from the Gut.

GE has been moving a lot of work to India and saving money. Pitching to the US-India Business Council and Indo German Chamber of Commerce can be the starting points.

At the very least, this effort will neutralise the negative impression created by Enron.

Target services: Banks, insurance companies and mutual funds must be convinced to shift their back-office work to India. The present conditions are ideal as financial institutions scramble to cut costs.

Again, several of these firms are already doing business in India. The effort must be to convince select global names such as Citibank in banking, New York Life in insurance and Fidelity in fund management to shift their back-offices to India.

India's most valuable resource, its technologically capable English-speaking workforce, can position India as the services hub of the world.

Promote agro-based export industries: While the focus on services will develop urban and semi-urban areas, unless rural areas are modernised, India will be eternally poor with rising inequality.

India's parallel economy, which has also stashed money abroad, must be convinced to invest in India. Tax advantages and repatriation benefits should be provided and fully protected from political interference and bureaucratic hassles. Unless we get investment in rural areas, job creation will be difficult.

Create a result-oriented bureaucracy: The bureaucracy of India needs to shift from a stifling mode to a serving one. Hiring accomplished business managers and providing appropriate incentives to accomplish results will better serve the cause of promoting FDI.

A new approach would be to put such managers in charge of dealing with foreign investors and be responsible for facilitating their investment. The Foreign Investment Promotion Board, and the Foreign Investment Implementation Authority should be abolished.

The creation of a flat investor-friendly organisation of 50 managers who directly report to the minister would signal India's renewed commitment to attract FDI.

Accelerate privatisation efforts: Despite global uncertainty, privatisation efforts are moving well. Approximately, one-third of the world trade is accounted for by multinationals, who provide the bulk of the FDI flows.

As the public sector is privatised, multinationals can acquire existing firms and expand operations to serve the local market and export to the global market. The mergers and acquisitions process must be streamlined.

Infrastructure investment: FDI augments domestic investment and cannot substitute it. The golden quadrilateral project indicates world-class infrastructure can be built in India as long as it is economically viable.

A few successful high-profile projects in power, ports, transportation can bring in more FDI.

India has an opportunity to attract FDI of over $15 billion a year over the next five years. The Economist Intelligence Unit, evaluating business environment in 60 countries for the period 2002-2006, has ranked India 41st, ahead of China at 42nd.

More importantly, India has moved up five notches from its rank in the earlier period (1997-2001), while China has remained at 42. But leveraging this calls for leadership and vision to rise above parochial political interests to work across party lines, serving broader national interests.

However, status quo would mean that China would emerge as the services hub as well, diminishing India's prospects.

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