FDI Disparities

Updated: Dec 24 2002, 05:30am hrs
The state-wise numbers on foreign direct investment (FDI) approvals for the period August 1991 to June 2002 are not terribly surprising. The total number of approvals was 22,084 of this, Maharashtra, Delhi, Tamilnadu and Karnataka account for 45.8 per cent. A better indicator is the value of proposals rather than the number. Of the total value of Rs 2,81,334 crore, five states account for 52 per cent with Maharashtra leading the pack with 17 per cent, followed by Delhi (12 per cent), Tamilnadu and Karnataka (8 per cent each) and Gujarat (7 per cent). Bihars share is only 0.26 per cent. It may legitimately be argued that Delhis figures are misleading because much of what shows up as FDI approvals ends up as investments elsewhere in the northern region. While this is a valid point, it is impossible to correct for this and segregate figures. It may also be argued that what matters is actual inflows rather than approvals. Conversion ratios (percentage of inflows to approvals) vary state-wise and it is right to deduce that conversion ratios are higher in the more advanced states and lower in backward ones. But if actual inflows are considered, disparity across states will be more pronounced. Two questions arise. What explains the disparate state performance and what can be done to reduce disparities in FDI On the first, other studies highlight physical and social infrastructure, red tape and procedures and governance as major determinants of FDI inflows.

Contrary to what the states think, fiscal incentives are less important. In any case, with the introduction of the value added tax in April 2003, sales tax-based incentives will cease. However, the usual explanations may not provide the entire truth. This is clear from Punjab, which accounts for 0.7 per cent of approvals, or even Haryana at 1.25 per cent compared to 2.9 per cent in Orissa. Perhaps, the composition of FDI may provide part of the answer. In addition, since the initial base period FDI levels were low, a single proposal can distort the picture. For instance, Tamilnadu would not have been at 8.3 per cent had it not been for automobiles. On inter-state disparities, this is not specifically an FDI phenomenon, since domestic investment inflows and growth in state domestic product (SDP) also vary. However, SDP growth in many states in the 1990s is explained by agricultural rather than manufacturing growth and investment inflows are correlated with manufacturing and not agriculture. This explains why the shares of Andhra and West Bengal are relatively low. More pertinently, there is a band of backwardness and deprivation in central India, extending eastwards right up to the north-east. The hypothesis that voters will eventually vote out bad governance is long term, even if it has validity. Nor do labour migration or doles through finance commissions provide a satisfactory vent. If unrest is not to become endemic in the heart of India, schemes to diffuse socio-economic tensions will have to be found.