Rhetoric versus reality

India remains unattractive for FDI

There are no surprises in the latest World Investment Report 2001 which points out that foreign direct investment inflows to India marginally rose from $2.1 bn in 1999 to $2.3 bn in 2000. The country continues to miss out on opportunities to attract FDI, made glaringly obvious by the noteworthy performances of other developing Asian nations. India remained a poor seventh below smaller countries such as Malaysia, Korea, Singapore and Taiwan. By contrast, China had FDI inflows of $40 bn, while Hong Kong notched up $64 bn. It’s clear that India is not an attractive destination for FDI. The Report also points out that there has been an 18 per cent deceleration in the growth of global FDI flows in 2000. What’s more, the current year may actually witness a fall in FDI inflows from the present $1.3 trillion, thanks to the slowdown in the world economy. Consequently, the size of the FDI cake is bound to shrink. Concerted efforts will therefore, be required to maintain the current levels of inflows. India indeed will find the going tough. That it is the subcontinent’s largest recipient of FDI is poor consolation.

The Report should be an eye-opener to our money managers who would still have us believe that everything is hunky-dory on India’s external front. Aren’t our foreign exchange reserves looking up when the global economy is slackening, they would ask? And what of burgeoning investments by foreign institutional investors? If our forex reserves have gone up in the last few months to cross $44 bn, it has more to do with our efficient forex management, than with any perceptible, positive change in India’s external outlook. This awareness is necessary if India is not to become complacent in attracting overseas investments. Equally important is the need to keep in mind that FDI is more stable than foreign institutional investments. As events following the recent stock market crash show, FIIs are the first to pull out when conditions turn unfavourable. More important, a developing country like India can ill-afford to depend too much on hot money which has a tendency to flow in either direction at short notice. As political stability, economic health and prevailing investment climate are critical factors influencing FDI, it is time to go beyond the rhetoric and seriously address these important issues.