Originally Published 2015-11-02 10:23:15 Published on Nov 02, 2015
Even if we go by the Financial Times' FDI figure, let's remember that having low FDI inflows for a year or half a year does not mean much. China has received, on average, $100 billion per year in the last decade compared to India's annual $20 billion figure. The best way to compare is looking at the per-capita FDI stock, which is $691 for China compared to $181 for India in 2013.
India's 'number one' rank in FDI: Is it enough, even if it's true?

India has pulled ahead of China and the United States to take pole position as the most favoured destination for foreign direct investment (FDI), according to the Financial Times, having received $31 billion - $3 and $4 billion more than China and the US respectively. Moving from fifth position last year to the top position now as the most attractive destination for FDI certainly reiterates that India is the one bright spot in the world economy today.

Putting aside any data anomalies for the moment, the FT's ranking recognises India's efforts to boost investment through a number of reform measures and that it is the best market to put money in, as other emerging economies including China are slowing. At the same time, a 2015 World Economic Forum (WEF) report, by placing India 16 positions higher at 55 among the world's most competitive economies boosts India's image and supports the government's claims that the investment environment is changing for the better. Finance Minister Arun Jaitley and DIPP Secretary Amitabh Kant have been quick to take credit. However, is being the number one FDI destination good enough to 'Make in India' a success story and achieve 8-8.5 per cent growth? A reality check is needed.

First, there is a discrepancy in the FDI inflow data used by the FT and that reported by the Reserve Bank of India (RBI). The FT puts FDI inflows (estimated capital expenditure) into India at $31 billion in the first half of 2015, whereas the RBI's figure for net FDI inflows during the same period is $19 billion. Of course $19 billion net FDI inflow is more than double of last year's figure for the same period, which was $8.8 billion. Adding the net FII of $16.8 billion in 2015, total FDI figures go over $31 billion - but those are not capital expenditure, and cannot be part of FDI inflows.

However, the data still suggest two things: FDI inflows to India have increased while those received by the rest of the world declined; and FDI outflows from India have drastically gone down, from $9 billion in the first half of 2014 to $1.6 billion for the same period in 2015. So investors, both foreign and domestic, do recognise the efforts of the government to improve the investment environment and the potential of the Indian economy to attract investments needed for sustained growth.

Moreover, comparing India's FDI flows with those of China for the first half of 2015 and celebrating is also not right. There is confusion with regard to the FDI figures even on the Chinese front. For example, the National Statistical Bureau of China puts FDI inflows into China at $68 billion compared to the FT's figure of $28 billion.

Even if we go by the FT's figure, let's remember that having low FDI inflows for a year or half a year does not mean much. China has received, on average, $100 billion per year in the last decade compared to India's annual $20 billion figure. The best way to compare is looking at the per-capita FDI stock, which is $691 for China compared to $181 for India in 2013. Moreover, this voluminous FDI has been there in China for a longer time than in India, contributing to technology, exports, competitiveness and growth. No wonder China is the world's factory when it comes to manufacturing.

Even if take this positive news at face value, we need to back it up with actions on the ground. The first is to look at the ease of doing business environment. India still ranks 130th in the ease of doing business indicators of the World Bank. Second, India needs to look at infrastructure development. Though the transport minister is very pro-active in making new roads, we have a long way to go when to it comes to energy, telecommunications and other modes of transportation including the Railways and aviation.

In fact, most power companies are bleeding today because of bad balance sheets and bankrupt state electricity boards. Moreover, the government is not in a position to meet the required infrastructure investment. Therefore, we need to develop a better regulatory mechanism, a rational pricing system, reform financial markets and strengthen dispute resolution mechanisms so that the private sector finds infrastructure projects economically feasible.

The second is land acquisition; all of us know what happened to the proposed amendments to the Land Act 2013. Land amendments are crucial for 'Make in India'. Now the government has given up - a kind of failure on its part - and passed the issue on to the states. Though competitive federalism for higher growth may force states to create an enabling environment for land acquisition, populist politics may not allow the states to move forward. Moreover, seamless infrastructure for a unified market needs to be designed and executed at the top, not by states in bits and pieces.

Third, there is a need for improving governance for fast clearances, starting from registration to providing utilities. Rationalising the number of clearances for setting up business, developing a co-ordination mechanism among different departments at the Centre and in states, using e-governance extensively for transparency and efficiency will go a long way.

It's high time the Centre worked seriously with the states on policy co-ordination on investment and FDI. Sometimes, the Centre is proactive while states languish with outdated rules and mechanisms. Though it's politically tough, it is time to revisit rigid labour rules - around 250 in number at the Centre and the states - and rationalise them. Of late the Indian labour force has been accommodative; but existing rules still scare investors, particularly foreign investors.

Another issue for inviting sustained inflows is improving the technology ladder of Indian firms, which is possible if we create a better intellectual property rights (IPR) eco-system that incentivises innovators or gives protection to innovation. Foreign investors are scared about sharing their technology and going for licensing or joint ventures because India has a weak IPR regime.

Another important factor for investors is transaction costs. Two things among many that matter here are infrastructure and trade facilitation. A 2015 CAG report on trade facilitation, which has been tabled in Parliament, shows how poor is policy with regard to implementation of trade facilitation. There are delays across the board in all ports, whether it is registration, clearance, documentation, customs, etc.

In fact, the CAG report finds that 76 per cent of vessels have to wait for more than two days to get an allotment berth. The unit cost per container of exports in India in 2015 is $1,332, compared to $823 in China. India ranks 54 in the Logistics Performance Index compared to China's 24 in 2015. High trade and transaction costs make investment in India uncompetitive.

Overall, if government is serious about using this "number one" rank to attract investors and help 'Make in India' succeed, many more changes are expected on the ground.

(The writer is a Senior Fellow at Observer Research Foundation, Delhi)

Courtesy: The Business Standard, October 31, 2015

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Kangkanika Neog

Kangkanika Neog

Kangkanika Neog Programme Associate Council on Energy Environment and Water (CEEW)

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