India has earned the unwelcome distinction of being the only emerging economy, other than Saudi Arabia, on the list of the world?s top 20 FDI destinations to have reported a decline in FDI inflows in 2010. The UNCTAD World Investment Report 2011 notes inflows into India declined by a steep 31% to $25 billion, taking her down eight notches from the 6th slot in the global rank to the 14th. Even Pakistan, which attracts less than a tenth of the FDI that India gets, reported a lesser decline of 14% in FDI inflows in the year. India?s dismal performance looks more disconcerting placed against the huge leap developing and transition countries together made in global FDI flows in 2010, crossing the half-way mark for the first time. This shift was purely on the merit of emerging economies in East Asia (read China and Hong Kong), Southeast Asia and Latin America. Global FDI flows in 2010 at $1.24 trillion were still 15% below the pre-crisis average, but India cannot take cover under that argument because the year was marked by a reasonable increase in global production and, more pertinently, a sustained shift of the base of production, and consequently of consumption, in favour of emerging economies.
The disaggregated FDI numbers show why India is in trouble. Post the meltdown, FDI has risen in the manufacturing sector by 48% while the share of services and the primary sector has declined. India is not the best destination for manufacturing largely because its government procrastinates on big ticket investments, like Posco. The report has one more insight. Developing countries score better on greenfield investments than cross-border M&As. It says more than two-thirds of the total value of greenfield investments come to these economies against only 25% of cross-border M&As. The implication is that policy delays cost India more than they would have had the country been on a higher stage of development. The UNCTAD report also highlights that China?s celebrated comparative advantage in low-end manufacturing is declining due to rising costs. It should be a wake-up call for the Indian government that Southeast Asian countries like Indonesia and Vietnam have already begun to benefit from this trend, while China is moving to high-end production. As the data on FDI in manufacturing shows, India has failed to capitalise on this shift. We seem to be losing the plot even in services. While six Indian cities, along with Shanghai, were among the top 10 locations for global services for outsourcing in 2010, three Chinese cities made their way to the emerging cities? list while none from India figured. Anyone listening?