FDI talk louder than the walk

While FDI inflows into the country are heartening, relative to China we have a long way to go. And the reason is that while the Indian economy might be booming, our infrastructure is, literally, the pits.

By Suvrokamal Dutta

Lately, India has emerged as the latest and the most sort after destination for Foreign Direct Investment (FDI), the reasons for this being many. Being the world's 10th largest economy, and its fourth in terms of purchasing power parity, India has emerged as a potential player for FDI and non-resident Indian (NRI) investments. The country has a large reservoir of skilled labourers at internationally competitive costs, a large entrepreneurial base, and a diversified manufacturing structure, which makes it easy to find partners for collaborations. It also has a vast scientific and technical humanpower base of more than 20 million—more than the population of Taiwan. The number of literates in India is more than the populations of France and Japan combined.

India has a vast domestic market of a 300 million-strong middle class and another 700 million people whose capacity to purchase is gradually increasing. A recent international agency report predicted that the Indian economy will become one of the world's largest by 2050 AD. What became as a drizzle in the 1980s—the boomtime of the Indian economy—is now pouring in like a torrential downpour. The GDP growth rate of 8 per cent that began in 2003 with a rebound in Indian agriculture has been followed with a boom in manufacturing and service industries.

In the past couple of months, there has been a series of announcements of big investments by major foreign and NRI companies. Bill Gates, in his recent visit here, announced that the Microsoft would invest around US$ 1.7 billion over the next four years in India; Intel, the world's largest computer chips company, has decided to invest over US$ 1 billion in India; CISCO has announced plans to spend US$1.1 billion over the next three to four years in the subcontinent.

Vodaphone's buying shares worth US$ 1.5 billion in Bharti Televentures is another big FDI inflow. To compete with China in terms of FDI, India should aim for an annual growth rate of 10 per cent, a fact that Prime Minister Manmohan Singh pointed out recently. The background to this imperative is the fact that, so far, India has not attracted more than US$ 3-4 billion annually compared to FDI inflows of US$ 55-60 billion into China. The number of foreign and NRI equities that invested in India from August 1991-November 2002 is 15,761 with a total foreign investment of Rs 283,447 crore.

Matters are improving, however. FDI investment in India nearly doubled to US$ 2.9 billion during April–July 2006, up from US$ 1.5 billion for the same period last year; it represents a growth rate of 259 per cent. According to the Reserve Bank of India (RBI), India has received US$ 50.1 billion since 1991, of which US$ 16 billion, or 32 per cent, has come in since April 2004.

The negative side of this FDI and NRI inflow is the constraints of Indian economic growth, which are not external but internal. The ups and downs in Indian agriculture play a major role in constraining the Indian growth rate, and problems are compounded by infrastructure riddled with bad roads, incomplete flyovers, underdeveloped airport facilities, and so on.

However, a very reassuring development has been the tremendous boost that the recent budget has given to industrial infrastructure and FDI investment in India. It brought out the positive side of the story: the resilience of the Indian economy, the rapid growth of Indian agriculture, the leg-up to infrastructure, the huge global outsourcing boom, and a well-regulated and deep capital market. Looking at the current rate of FDI inflow, the country can attract a record of US$ 12 billion worth of FDI this fiscal year. The commerce

minister feels that it is possible, although he sounds a note of caution: “There is competition not only just from China but also from others like Thailand, Malaysia and so on. We can't lose focus on attracting investments since we can't get inflows by giving lectures but [must] work on ways to get investors.”

If we look at the overall Indian economy with its energetic stock market, a buoyant exchange rate of Rs 43.29/30 per dollar (at the time of going to press), and a healthy growth trend in the major sectors of the Indian economy, the environment looks extremely positive for FDI and NRI inflows. Compared to China, though, it still lags behind.