India is likely to receive less foreign direct investment (FDI) in the next one year considering the recent developments around the world. There has already been a drop in FDI by 48 per cent to $1.04 billion in January 2011 as compared to January 2010 when India received $2.04 billion. This year there will be competition for FDI from Japan which is striving to get back to normal. It is the third most important industrialised country in the world which means that there will be severe economic repercussions of the earthquake that struck Japan on March 11 on the rest of the world. Reconstruction will require a huge expenditure and can only be undertaken with the help of foreign assistance and investment.
Japan may need alternative sources of power because of the problems with nuclear energy it is facing, and its increased demand for oil may lead to a further rise in international oil prices which have not stabilised as yet. Much will depend also on the emerging pattern of the Libyan crisis. India's oil-import dependent economy may suffer further inflationary pressure due to a big hike in the international oil price, making India a less attractive FDI destination.
Japan is also an important foreign investor for India and the investment flows are likely to slow down drastically. This will further aggravate the present scene where India's important investors are having problems of their own like in some of the European Union countries. India, however, will need FDI as it brings technology as well as foreign exchange and the benefits are many more than foreign institutional investment (FII) flows that go into bonds and equity. FDI is much more stable and it is not subject to volatility.
On the whole, India will have to give clear signals that it is going to open up FDI further. Many foreign investors have been waiting for news about the opening up of the multi-brand retail sector but a firm decision has not been taken about it because there are around 33 million small retailers in the country whose jobs may be at stake. Also, the opening up of the insurance sector allowing a higher percentage of foreign investment (from 26 per cent to 49 per cent) has been on hold for some time. These trends are likely to make many investors wary about India's policy towards FDI in the future.
To add to the existing negative perception of India as an FDI destination, a recent report by a UK-based firm Maplecroft, which has compiled a Global Risks atlas for 2011, has listed India as the 16th most riskiest country to invest in on account of security hazards. It is surprising that India has been clubbed with Niger, Bangladesh and Mali as far as investment risks are concerned.
The report takes into account seven key global risks, including macroeconomic risk and threats around security, governance, resources security, climate change, social resilience and the presence of illicit (black) economies. Even though India has a high growth rate, other considerations like threats from militant extremists and Maoists are counted as important. Also, now it is well recognised that though there are pockets of immense prosperity in India, there is extreme poverty which is always considered a security risk. The report also says that India lacks social resilience and has poor human rights record. It points out that a large section of the population lacks basic services like education, health care and sanitation. It also highlights India's less productive workforce and its greater susceptibility to pandemics and social unrest. The government ought to be worried about the perception of India as a high-risk country.
In the recent Economic Survey the government has indeed acknowledged in Chapter 2 that bureaucratic delays are behind India slipping in the World Bank's ranking of countries according to the government's efficiency of doing business.
The World Bank ranks India as 134th among all countries in terms of the government's efficiency of conducting business. Only if there are major changes in the way the Central and state governments deal with foreign investors, it will bring about a big difference. Within the country, however, there is much difference between how state governments perform and some states are more efficient and have attracted greater amounts of FDI than others. If the laggard states performed better, then according to the Economic Survey, India's rank could be 79th.
Undoubtedly, if India is to sustain a high growth rate, important in the eradication of extreme poverty, there will have to be more foreign investment in infrastructure and manufacturing which would lead to an increase in jobs. But obviously foreign investors would like to come to India for their own profits and will choose areas like mining that give high and quick returns but are environmentally unsustainable. How to make investments in areas that are important for us more attractive to foreigners will be a challenge for the government.
If India can overcome some of these well-acknowledged hurdles to FDI and with global investment flows back to normal in a few years' time, the future looks bright for India. According to a recent survey by Ernst & Young, India will be an attractive FDI destination in the future. Indeed foreign investment projects have increased by 60 per cent from 2003 and the number of jobs created has gone up by 30 per cent. In their interview of 500 global business leaders about the potential of the Indian market, a large majority believed that as early as 2020, India will become a global leader in education, R&D, innovation and as a producer of high value-added goods and services.
Also 70 per cent of the global businesses already present in India and which formed part of the survey indicated that they would expand their operations. This is because India will offer a huge market in the next 15 years and the middle class is set to treble in number during this period. India's young demographic profile is also going to be an advantage.
In terms of business activity, manufacturing can attract the most FDI projects and India is likely to emerge as a manufacturing export hub, especially in automotive. But to do so, recent trends in industrial production will have to be reversed. Manufacturing output, which accounts for 80 per cent of industrial production index, rose only by 3.5 per cent in February 2011, down from 16.1 per cent growth a year earlier.
To ensure that manufacturing remains an attractive foreign investment destination, India will have to rev up its education system with special focus on higher education, health and skill training programme for India's young population.
(Jayshree Sengupta is a Senior Fellow with Observer Research Foundation)
Courtesy: The Tribune
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