Wednesday, December 29, 2010

FDI far short of potential

The large domestic market should draw global investors. But if the flow has not been exuberant, the problems must lie in the policy environment.

For all the talk of India's vibrant economic recovery and the prospects of ending the year with GDP growth of over 8 per cent, the sad fact remains that not much global capital has come into the real economy by way of foreign direct investments. This year, for instance, the flow was 27 per cent lower than the previous year, with the period between January and October recording $17.37 billion against $23.8 billion in the corresponding period last year. With Indian companies exuding a growing self-confidence and healthy economic indicators, one would have expected global capital to view the organised economy with greater enthusiasm than is suggested by FDI data.

The issue gets more intriguing when one considers the reputation India enjoys as an investment opportunity. The United Nations Conference on Trade and Development (UNCTAD) places India among the top five attractive destinations — a positioning that it expects will continue into the next year. Yet FDI into India is still minuscule against its potential. It would be tempting to contrast China with India but one should do so only with the vastly different contexts in mind. China is viewed by foreign investors principally as an export hub with the specific advantage of exceptionally low labour costs (though that may be changing). Also, its domestic market plays a very small role in their calculations. Just the opposite is the case with India. The large domestic market should draw global investors — and in some sectors, namely automobiles and pharmaceuticals, it has — but if the flow has not exactly been exuberant, the problems must lie in the policy environment. To its credit the government has this year streamlined the regulatory framework, consolidating all the policies with the emphasis on continuity; changes will be made twice a year, unlike before, and this should bode well for investors keen to know where they stand. While investments in most sectors do not require prior approval, except for keeping the RBI in the loop, some contentious issues may mar the environment: policy ambiguities relating to FDI in retail trade and the five-year-long flip-flops on a few large steel projects do not send the right signals about clear-headed and committed policy-making. They point to the biggest glitches that policymakers have been either reluctant or unable to clear to make way for greater FDI flow.

The big-ticket investments in Orissa would have changed its economy and also set the trend for other backward States but for the controversy over land acquisition and environmental clearances. Such roadblocks cost the nation dear.

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