Economic Highlights

New Delhi, 11 October 2010

CWG Euphoria

LITTLE HOPE FOR FDI MEDAL

By Shivaji Sarkar

Do Games bring in investment? Organisers of large events always brim with hopes that the exposure to events would bolster the image of the country’s capabilities and create the peg for necessary investments. This is a long-term objective. However, in the short run such massive shows do not bring in much, except for sponsorship money and in some cases contributions from a few countries.

Sporting events have become mega events requiring huge expenditure. During the past many games, organisations in the host nations have not made much money. An exception however, was the Los Angeles Olympics held in 1984. The Games made $200 million profits largely on US public sector funding. No other game organised after that is known to have earned much, if at all.

The expectation of the Government to have large foreign direct investment (FDI) in the backdrop of the Commonwealth Games (CWG) may not bring out the reality. Speaking at the Union Commonwealth Business Forum, organised by the Commonwealth Business Club of India (CBCI), set up by the games Organising Committee, the Union Commerce and Industry Minister, Anand Sharma, stated that he hoped that $30 billion FDI by 2011 would pour in.

Is this due to the hosting of the CWG? Apparently not. The country has got $100 billion FDI during the past three years. Sharma’s assessment is slightly less than what the country has been receiving every year i.e. around $33 billion.

The aim of the CBCI was to raise sports sponsorship and market India as a preferred business partner and destination across the Commonwealth. Business delegations from several Commonwealth countries including Australia, Malaysia, Singapore, South Africa, Britain and Canada participated in the CBCI meet. And the OC had estimated that the Games would spurt the country’s growth by a whopping $4940 million till 2012. The 2005 Melbourne Games, the OC claimed, created an economic impact of $1600 million on Australian GDP. The 2002 Manchester Games, it added, had created an impact of about $ 3400 million in Britain’s economy.

The CBCI meeting did not directly bring in any additional business. The countries talked in positive terms, and that is precisely what such meets do. The delegations do not have powers to promise much and whatever they do is again vetted when they go back home. The investors make a note of the opportunities available but have often been found to be extremely cautious when it comes to actual investment.

A major concern of the world community is that India has not yet matched the international level of sports performance. The performance at Olympics was dismal, Beijing included. This unfortunately also creates a perception about a country.

It has been observed that the estimates of gains flaunted before the Games are often exaggerated. Actual gains in developing countries are far less and that includes South Korea which spent $2 billion for Seoul 2002 World Cup, while the US spent only $30 million at the Los Angeles Olympics. Neither South Korea nor the US received any additional FDI.

Even MoUs signed during CBCI-type meets are no guarantee of investments pouring in. In the past, many such MoUs have turned out to be mere paper documents worth little. In 1994-95, the Uttar Pradesh Government had signed Rs 53,000 crore worth MoUs, hardly a few actually materialised.

The CBCI meet may be a good ice-breaker at a time when the world is passing through a recessionary phase. This, however, does not indicate the actual flow of investment that eventually may pour in.

The stock market is buoyant. It has touched a 33-month high with over $16 to 20 billion investment. But this should not be seen as an indicator for the overall economy. The stock market has its own dynamics and functions on different factors. Most large foreign institutional investors are for short-term gains. Their presence should not be taken as an indicator for the large FDI.

Meanwhile, the country’s current account deficit tripled in the quarter of June as imports soared. The deficit widened to $ 13.7 billion from $ 4.5 billion in the previous year, according to the Reserve Bank of India. It raised the spectre of volatile currency when the tide of overseas fund flows in. The exports did not match the growth.

Indeed, the current account in the balance of payments measures the net position of a country’s exports and imports of goods and services. Inflationary situation and the RBI’s steps to increase interest rates have boosted the profits of the banks and financial institution but made credit expensive. The companies find fund raising cheaper in the developed western nations. Widening deficits may make the job of the RBI difficult in maintaining stability in foreign exchange market.

Cheap money from across the globe is pushing up the value of the rupee, making exports more expensive and unattractive for buyers in the West, who are tightening their purses. In the long run, however, the rupee might weaken.

Expecting investment to pour in at a higher rate is not supposed to be a pragmatic approach in the difficult global scenario. Investors are extremely sceptical. They look for high short-term and long–term gains. The fundamentals of the country may ensure gains in the long term provided they remain stable. The investors would be coming on the strength of the domestic market consumption and not for an export market. Importantly, the domestic market has yet to show its strength.

The country is taking a bigger risk in pushing its growth as oil prices are bound to rise and the nation is yet to have a policy to cut down its oil import bill. Additionally, conditions need to be created to contain interest rate hike, which ultimately hurt investment and growth.

Another concern is the fall in the service sector surplus to S 20.5 billion from $ 21.2 billion a year due to a slowdown in the non-software services and investment income, largely comprising returns from deploying foreign exchange reserves.

Besides, nobody has yet estimated the impact of the expenditure that has been made on the Games. Many countries which have hosted such games, including Greece, Mexico, Spain, South Korea and Australia have incurred losses to the tune of many million dollars.

Even the Asiad 1982 despite being a sparkling event did not generate much of investment. Rather almost eight years after that the event, the country had to pawn its gold with the Bank of England to come out of the foreign exchange crisis. The nation needs to be cautious on its CWG euphoria despite it having brought the world focus on the country.--INFA

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