By: Hari sud
February 10, 2005

China’s roaring success in past twenty years is on the back of Foreign Direct Investment (FDI). Chinese smartened up in 1980 and enacted rules and regulations to welcome it. India, belatedly, has to copy this concept. Initially FDI was thought to be Western economic imperialism in modern times. Leaders brought up with Nehruvian economic mould spurned upon it. Hence India missed the investment bus for almost 25 years. 

Not any more! 

India needs FDI, and India needs it now. It needs it to boost the economic growth, which is stuck at 6.5% (2004-05). A bigger economic revival is possible if, money, technology and human expertise arrive from abroad on a much larger scale than it has been coming in last few years. As the eighties progressed, commercial bank lending, to fund economic growth in the third world countries, declined. Instead the donors in the West promoted FDI. Asian countries (with the exception of India) understood this change and devised rules and regulations to attract it. China and Asian Tigers (Thailand, Singapore, Malaysia, South Korea etc.) were the net beneficiaries. The West did not care, whether the recipients were a former enemy or a friend. Money saw no enemies or friend, instead it moved in the direction of minimum rules, pro-active government help, lower wages, low priced products and an understanding to deposit the proceeds of the export boom in American Banks or bonds. China attracted about $20 Billion a year from 1984 to 1997 and thereafter $40 Billion till 2003. Last year’s statistics are still preliminary, but a momentous increase to $60 billion is indicated. The latter is a huge percentage of total of about $150 Billion FDI spent all over the world. Asian Tigers received a fair share but not as much as the Chinese did. 

India received a meager $4.3 Billion. Although, Indians are rejoicing at this amount, which is 40% higher than previous years, but it is a drop in the bucket. 

What Does FDI Do the Manufacturing Economy? 

It transforms the local economy into an export lead zero capital cost growth wonder. FDI also brings with it expertise which is as much important as the capital itself. Since, it is the multinationals, which are at the leading edge of the FDI lead exports, they ensure free access to the market place. In other words these exports are free from quotas and restrictions. As the exports grow, the brand popularity grows. The consumer nations start to trust the quality and reliability of the supply. It leads to more and more exports and more incoming FDI. China is in that mode, currently. The Asian Tigers were in that mode until 1998-99. India is nowhere near in attracting FDI compared to both the aforementioned economies. That is why the Shanghai skyline resembles the West and Indian cities present a dull and dreary look with lack of water and restricted power supply.  It is for IT and BPO boom that some semblance of respectability exists for India in the world. Otherwise, India as a nation would have disappeared from the mindset of the West.  

FDI in India 

Election of AB Vajpayee as Prime Minister of India in 1998 with his right wing agenda was a welcome change. His prescription to speed up economic progress included solution of all outstanding problems with the West (Cold War related) and then opening gates for FDI investment. In three years, the West was developing a bit of a fascination to India’s brainpower, powered by IT and BPO.  By 2004, the West would consider investment in India, should the conditions permit. By the end of Vajpayee’s term as Prime Minister, a framework for the foreign investment had been established. The new incoming government of Professor Manmohan Singh in 2004 is further strengthening the required infrastructure to welcome the FDI. 

Today, fascination with India is translating into active consideration of India as a destination for FDI. The A T Kearney study is putting India second most likely destination for FDI in 2005 behind China. It has displaced US to the third position. This is a great leap forward. India was at the 15^th position, only a few years back. Thanks to the hard work of the politicians in control in Delhi for the last five years. To quote the A T Kearney Study “India's strong performance among manufacturing and telecom & utility firms was driven largely by their desire to make productivity-enhancing investments in IT, business process outsourcing, research and development, and knowledge management activities”.  

Still, India has not made into the grade where manufacturing investment will be targeted to it. That status belongs to China. But, progressively positive noises are being heard in the world financial circles to consider India at par with China. A few of the remaining antiquated labor laws in India need to be repealed and neglected infrastructure are upgraded to put an investor at ease. The irony is that all plans to redress the labor laws or upgrading of the infrastructure are shot down by left leaning politicians at the federal level. Only recently a proposal to use a part of India’s huge foreign reserves to rebuild infrastructure was shot down by these politicians. To the contrary, they have nothing-worthwhile alternative to offer.  

New Delhi Galloping to Get FDI to India 

The Petroleum and Chemicals Minister is rushing to the West to search for interest in investment in India’s Oil and Gas sector. With new shine on India’s image abroad, he may succeed. The word “liberalization” is very commonly heard in the political and government circles in Delhi. The budget 2004-05 was investor friendly. The expected 2005-06 Budget is expected to make a few more structural changes to the Indian economy and maintain the shine on India’s FDI friendly image abroad. Of late, the brand retail segment is showing signs of life. This may bring in some more FDI. 

Only recently the Note 18, which made mandatory for the foreign joint partners to seek clearance from the local partners in fresh investment has been withdrawn. The conformity with the patent regime worldwide has been enacted in accordance with agreement with WTO. Additional consideration to open foreign ownership in various sectors of economy is in progress but a bit slowly. Political support needed to undertake it, is missing, hence the delay. Issues like this are handicapping the foreign investors. It is a live or perish situation. If India does not change, India’s image will suffer and investment will disappear.  

Welcome Bush to India and Get a Boost to FDI.  

President Clinton’s, Year 2000 visit set India apart as major IT and BPO power of the world. It is a small consolation. It has employed 800,000 people and given a boost to lagging exports. If President Bush comes to India, as he is supposed to have told Prime Minister Manmohan Singh during his pre-inaugural conversation, then a stage may be set to make India an alternative-manufacturing hub of the world. A substantial influx of FDI may take place. Various think tank studies in US, of growing Chinese economic might and with it, growing Chinese political clout have worried the Bush Administration.  They really want to turn the FDI tap to China, off, a notch or two. India in their calculations is the best alternative. This visit will straighten up a lot of Cold War era issues, which are still lingering. The bonus will be some measure of peace with Pakistan. The latter has been emboldened with influx of cash and arms from USA in last two years. Also the unfriendly US State Department may turn off its nit picking on minor issues with India. It is a win-win situation. Let India not miss it.  

(Recently published BBC polls of various countries indicated that President Bush is very popular in India) 

Compete With China, Ignore Pakistan  

Pakistan will always be around to put roadblocks to India’s progress. At times, it will generate war hysteria and threaten a nuclear war. It is a ploy to scare investors away. But now, US with a hammer lock on Pakistani Army and its economy, is in a good position to curtail their war fever. For India, the best remedy to contain Pakistan is to keep spending more on defense, as the economy could afford. This will keep Pakistan off balance with an arms race.  An alternative policy of encouraging Bulochis, Gilgit & Hunza Shiite and Sindhis and separatists elsewhere in Pakistan will pay rich dividends. 

China is the main competitor. Today, we have to compete with them for investment dollars. Tomorrow we have to compete for trade and market influence in Indian Ocean Littoral States and South China Sea. Today, China has an upper hand. Little later this upper hand has make room for India. Should Chinese, choose to make trouble; backing of US has to be sought. The latter is already hinting of encouraging India to police the sea trade lanes of the Indian Ocean.  This strategic partnership with US will take time to build. Top priority is to be given to the economy.  A booming economy will always curtail outside troublemakers enthusiasm. 

Eject the Colonial Past Mentality; Get back to the Task of rebuilding the Economy 

A lot of politicians of the Nehruvian culture believe that outside money will dominate the politics and may result in the rebirth of the colonial past. It is untrue and is a figment of their imagination. Colonialism is born with instability and disunity. British gained full control of India, because the strong Mogul empire broke away. Piecemeal, the British were able to defeat everybody. Today, the colonialists of the past in Europe are weak and disunited. They cannot repeat the successes of the past. Iraq is a key example. The world in two hundred years has changed so much that technology is no longer monopoly of the West. The latter is well aware of it and wishes to trade with former colonies and prosper. In return the former colonies will have to prosper too.   

In addition, the economic management of the West under free market system, need to be learnt and copied.  This is possible only if we eject the colonial rebirth mentality out of our mind set. 

Agriculture & Manufacturing for Fuller Employment 

Unemployment and under-employment is key cause of political unrest in third world countries, India included. There are only two known ways to tackle it. First is to make agriculture profitable and more rewarding and the second is to industrialize speedily. Agricultural reforms have been largely successful in India. These have resulted in green revolution and food self-sufficiency. Fifty percent of the population makes it’s living on it. Higher outputs with additional investments will make agriculture and agro-industries provide better returns and greater prosperity. But, it cannot provide the clout, which India seeks. This has to come from India’s industrial might.  Industry will make goods and services, which will enrich India, employ millions and provide overall national security from any outside aggressor. 

To achieve all the above, FDI is needed in abundance.

Hari sud