India News and Features Alliance (INFA)

The domestic market in India comprises as many as 300 million consumers and offers easy access to the entire South-East Asia region. Although the country lags behind China in attracting foreign direct investments (FDI), a recent World Bank report revealed that India was better placed to attract investment, having addressed particular bureaucratic obstacles and tackled the problem of under-investment infrastructure.

The Government welcomes foreign investment, with policies designed to ease entry, location decisions, and choice of technology, production, import and export. No income- tax is levied on profits arising from exports. Investors are also attracted to India by its rich mineral and agricultural resources. The country boasts of a well-established major manufacturing sector that encompasses almost all areas of activity. On hand is a huge pool of skilled workers and professional managers; wage levels are competitive.

India has a substantial experience of free market economies, and investors will find a sophisticated financial sector and vibrant capital market that boasts over 9000 listed companies.

Undoubtedly, China’s track record in attracting FDI is far superior to that of India. In fact, India However, within this otherwise firm conviction about unmatched Chinese superiority in attracting FDI inflows vis-à-vis India, there has occasionally been some skepticism about what all China includes while compiling its FDI figures. has been considered an “underachiever” in attracting FDI.

Consequently, skepticism remains about the actual intensity of the FDI gap between ChinaIndia, as suggested by the official statistics of the respective countries. Despite this, China is far ahead of India in its FDI inflows because of superior infrastructure, less and corruption and no bureaucratic hurdles in attracting FDI.

Surprisingly, foreign direct investments to the tune of $300 billion are available for the developing countries and the two main economies which can attract these FDI are India and China, which in any case attracts about $170 billion whereas the share of India remains only about 48 billion which is a big gap between the two economic giants. A serious thinking has to be done by India as to how to attract the big chunk of FDI into the country.

The main reason for poor performance by India in attracting the FDI as enunciated by the developed countries are poor infrastructure, far too many bureaucratic hurdles in getting clearance for the land leases/property, environment clearance, poor power and water sources and poor quality of HR managers and skilled labour.

Despite all this, the Indian economy provides eloquent testimony to the old adage that nothing succeeds like success. Consider the data for the first half of this fiscal for FDI. Between April and September, FDI inflows were $4.4 billion, twice the quantum that came in over the same period last year. Much of the investments are from Singapore, which is replacing the US and UK as the major source of inflows.

Many are first-mile investments, which means that more will have to come in to transform the capital into productive assets. But as Commerce Minister, Kamal Nath, noted: “India is on the radar of global investors and data reflect their confidence in the Indian economy.” The pity is that only some States in the country are on the FDI radar screen.

Predictably, just five States garner almost all the FDI each year with one or the other getting the lion’s share. This time, the New Delhi region attracted the highest investments, followed by Maharashtra, Tamil Nadu and Pondicherry, Gujarat and Andhra Pradesh. Within the States, FDI flowed into the regions in and around the metros---New Delhi, Chennai, Mumbai, Ahmedabad and Hyderabad.

So, even while the increase in FDI is welcome, its concentration in some pockets is not. Policymakers must now concern themselves with the fact that high-value investments are piling up in islands of rapidly expanding development (and high disposable incomes) while the rest of the hinterland slumbers in backwardness and poverty. The States like Punjab, Haryana and Rajasthan have a great potential in attracting the FDI but these States have to improve their infrastructure make the FDI more attractive in their respective States.

The real danger of deepening regional inequalities is already upon us in the form of demands for job quotas and other revivalist tendencies that could form insurmountable roadblocks to sustained growth. Backward States too need FDI but that can come about only if there is a change in the perception of them as failures. The most tempting way of doing this is to provide tax incentives and exemptions.

The States like Uttarakhand and Himachal Pradesh have been given tax-free holidays against the wishes of Punjab, Haryana and Uttar Pradesh. These have indeed drawn once-unlikely investors to their fold on the strength of the Centre-granted tax break. But these new ventures cannot sustain for long if the infrastructure does not improve in concert, nor do they necessarily mean more jobs for locals.

The challenge has to be met with a more concerted effort. The backward States first have to pull in funds, whether private or public, into improving the social and physical infrastructure even as they commit themselves to maintaining a modicum of law and order, at least by the standards of the developed States. They would need to win the vote of the domestic investor even before they entertain dreams of an avalanche of FDI.---INFA