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: Till recently, only a few were sceptical of the conventional wisdom that China’s track record in attracting foreign direct investments is far superior to India’s. With its annual FDI inflows of $40 billion when compared to a trickle of $2-3 bn into India, it was virtually a settled matter that the fiery dragon had trumped the lordly elephant in the FDI sweepstakes; that two-thirds of its foreign investments was from the overseas Chinese diaspora, unlike the relatively limited contribution to India’s kitty from non-resident Indians. The sceptics based their opinions on the shaky statistical foundations of these numbers. A monograph written at the Rajiv Gandhi Institute for Contemporary Studies by John Elliot thus argued that while China indeed was ahead of India on actual FDI, the margin wasn’t nearly as large as was generally assumed. In 1994 for instance, while official estimates indicated that China’s lead over India was 35:1, a more realistic picture was 14:1. More recently, Guy Pfeffermann, chief economist of the International Finance Corporation, has lent added credence to this scepticism by arguing that China’s FDI was actually half of the reported levels of $40 bn, while India’s may be as much as $8 bn rather than $2-3 bn. Accordingly, as a share of their respective economies, FDI levels are roughly on par in both countries.
Why is this so? China’s FDI numbers include a substantial amount of round-tripping: A large amount of Chinese black money is recycled through Hong Kong and sent back to the mainland as FDI. Round-tripping in fact accounts for one-half of China’s FDI inflows, which thus reduces the reported level from $40 bn to $20 bn in 2000. By contrast, India’s figures of $2-3 bn don’t conform to the standards of the International Monetary Fund as they exclude reinvested earnings, subordinated debt and overseas commercial borrowings which are included in FDI numbers of other countries. China’s estimates also include foreign investments in property, which is not so important in India. Standard computation in fact raises India’s FDI levels to about $8 bn from the official estimates of $2-3 bn in 2000. As a share of GDP, FDI into China works out to 2 per cent, while for India it is 1.7 per cent. The IFC chief economist’s calculations thus suggest a revisionist view of conventional wisdom that there isn’t actually such a huge difference in the relative importance of FDI between the two...
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