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Why India misses the FDI busnews
21 September 2001

Mumbai: The World Investment Report 2001 vividly describes the perception foreigners have about India. It is dismal, to say the least.

This is stemmed from the fact that foreign direct investment (FDI) inflows into India rose marginally to $2.3 billion in the fiscal 2000 in comparison to the $2.1 billion in the previous fiscal. Compare this with other developing countries such as China and Hong Kong, which managed to attract $40 billion and $64 billion respectively.

Even smaller countries like Malaysia, Korea, Singapore and Taiwan have done much better than India, relegating it to the seventh position. The only solace, which India can draw from this entire episode, is that the total FDI in the fiscal 2000 saw a deceleration of 18 per cent in comparison to the previous year, but India showed a marginal growth.

This is not something to boast about, given the fact that other countries have fared better. India, despite its many inherent advantages such as cheap labour, an educated middle class and a huge number of technically qualified professionals, continues to miss the bus. We have no regard for our foreign exchange reserves, which stand at $44 billion, substantially lower than that of Chinas approximately $130 billion.

In order to attract significant FDI, the Indian government has set liberal limits in various sectors for foreigners to invest in. These are: private sector banking (49 per cent), finance companies (100 per cent), insurance companies (26 per cent), domestic airlines (40 per cent), domestic airlines (100 per cent), basic and cellular telecom (49 per cent), telecom (74 per cent - internet service providers with gateways), telecom (100 per cent - manufacturing), petroleum (100 per cent - refining, new units), petroleum (26 per cent - in state-owned refineries), petroleum (74 per cent - marketing), petroleum (51 to 100 per cent - upstream), coal mining (74 to 100 per cent), trading (51 to 100 per cent), broadcasting (20 to 40 per cent), power (100 per cent), pharmaceuticals (100 per cent), roads and ports (100 per cent), hotels and tourism (100 per cent), mining (74 to 100 per cent), courier services (100 per cent), pollution control (100 per cent) and advertising (100 per cent).

Why is it, then, that we continue to remain unattractive to foreigners for investment? Former director and vice-chancellor of Indira Gandhi Institute of Development Research Kirit Parikh says: The biggest problem is our bureaucracy. Though we have eased procedures considerably, there is too much red-tapism if one has to set up shop in India. Secondly, investing in developing countries is popularly perceived as risky and therefore FDI in developing countries is usually linked to higher returns.

Parikh talks about Enron to prove his point. Initially a higher rate of return was assured to Enron, but as realisation dawned that the power tariff to be charged by Enron was too high, the government backed out of the agreement. This also gave a very bad signal to foreigners.

And the third problem is the mindset. India did try and get a lot of FDI in the power sector, but we were not ready with our reforms. Our state electricity boards were simply not ready to work with private power companies, Parikh says.

Is there a way out? One way, he says, is to create special economic zones in India, the way China has done in Guangzoo. The advantage is that once the entrepreneur decides to set up a unit in such a zone, the responsibility of getting all the clearances lies with the managers of the zone. This way the entrepreneur is relieved of all the hassles and is left to concentrate on the business part of the project. One such zone is coming up in Positra, Gujarat. The other way is to simplify procedures, promote transparency and openness while dealing with foreigners.

Domain-B feels that apart from the above observations made by Parikh, another obstacle is Indias poor infrastructure. The chaotic transport conditions coupled with archaic port facilities are major stumbling blocks.

If we do not tackle these issue, India will even miss the last bus.

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Why India misses the FDI bus