In 2005, China attracted $72 billion by way of FDI. This constituted over 10% of its gross capital formation (GCF). In contrast, India?s FDI was $6.6 billion?less that 1% of GCF. Over 80% of the Chinese FDI came from the ethnic-Chinese dominated economies of Taiwan, Hong Kong and Singapore, and from overseas Chinese in the US. The share of diasporic FDI in India?s total FDI stands at only 4%.
The country needs to make FDI more attractive for the Indian diaspora. India has the world?s second-largest diaspora, after China, and with a substantive presence in all major countries. In their adoptive countries, Indians are recognised for their wealth and knowledge. Their contribution to these countries, and to the Indian economy, is enormous. They have transferred knowledge and expertise, sent home remittances, and have mediated the entrepreneurial energy that has led to the rise of India?s IT and ITeS sectors.
It is only as direct investors that the diaspora has a dismal record. The Chinese success cannot be wholly replicated in India for several reasons. Diaspora investment in China was basically limited to low-wage, labour-intensive manufacturing operations. It was unusually diversified and small-scale, averaging only $2.4 million. The situation is different in India. Its competitiveness as a low-cost manufacturing base that caters to small production facilities preferred by small-scale entrepreneurs is weaker on account of its policy of small-scale sector reservation, and limitations on allowing in FDI. Moreover, Indian expatriates are mostly professionals or traders, and lack the management expertise of manufacturing.
What are the policies needed to encourage inflows of diasporic FDI? First, the Indian government should not give any investment incentives to its diaspora greater than what it is willing to give to other foreigners and its own residents. The global ambition and success of Indian domestic entrepreneurs have also to be encouraged. The diaspora is pouring in massive sums into India?s equity markets. An important aspect of diasporic policy should be to tap the financial and knowledge resources of the diaspora and let it forge partnerships with domestic entrepreneurial skills.
Following the Chinese lead, India should allow 100% FDI in small and medium enterprises. FDI in these is limited to only 24%, with any foreign investment above it being subject to industrial licensing with a mandatory export obligation of 50% of annual production, and the manufacturer losing small-scale status. If we also remove the small-scale reservation, India can build a strong base in labour-intensive manufacturing with diasporic FDI and expertise.
To attract diasporic FDI, India also needs to open up its retail sector. A large number of Indian entrepreneurs in the US, UK and other developed countries are successful retailers. Their expertise and capital should be put to productive use in the Indian economy. A viable retail chain network through its backward linkages reduces cost-to-market and induces scale economies in several products which then become more competitive in the global market.
India receives $25 billion in remittances every year. This represents an important source of investment if properly tapped through entrepreneurial opportunities for the diaspora. Like the Philippines and Mexico, India should help returnees with investment advice to direct their foreign savings into productive domestic investments.
The Indian diaspora invests $32 billion in the Indian equities market, and a CII study shows that a further $5 billion of venture capital can be generated and channeled appropriately.
The creation of the Overseas Indian Facilitation Centre, jointly by the ministry of overseas Indian affairs and the CII, is an important step in the direction of creating a policy environment conducive to tapping the vast resources of entrepreneurial talent and capital of the Indian diaspora.
?Jayanta Roy is principal advisor, CII. These are his personal views