Gurgaon events should be a learning experience

Updated: Aug 1 2005, 05:30am hrs
It would not be out of line to assume that investors participate in a foreign territory primarily to seek better returns on investment than what is available to them on home turf. India has been present on the foreign direct investors radar in recent times as it presents promise of such returns and not really because these investors are emotional about developing our economy and markets.

Development incidentally, to whatever limited extent it may be, is a natural outcome of the so-called FDI. By that logic, incidents or actions that can possibly harm the economics of a business operation can dilute investor interest in the environment where such incidents occur. However, what really matters is the severity and frequency of such incidents.

Though historically, problems attributable to labour relations have been localised, places like Gurgaon were considered relatively trouble-free. However, recent events there indicate that such occurrences arising even in places perceived to be relatively free from labour-related problems cannot be ruled out. This calls for adequate mitigating measures. For, availability of labour at competitive rates is one of the considerations for choosing India as an investment/outsourcing destination.

While the sustenance of an enterprise will strongly hinge on the productivity level of its workforce, a balanced approach towards harmonising business with labour welfare should be looked at. While the well-being of labour and workers cannot be belittled, surely foreign investors would be mature enough to understand that an incident like the one in Gurgaon will not fundamentally alter the prosp-ects that a growing economy like India offers.

India still represents a growing market and is an increasingly attractive FDI destination. Statistics support this inference. Its favo-urable and liberalised investment climate has resulted in significant FDI inflows$3.42 billion in FY 2004 and $3.04 billion in FY 2005. While reinvested earnings inflows increased from $1.8 billion in FY 2004 to $1.82 billion in 2005, FDI inflows into equity capital (a key indicator of confidence) increased from $2.39 billion to $3.36 billion. Foreign portfolio inflows rose from $1.1 billion in 2002 to $8.8 billion in 2004. As per cent of net capital flows, FDI rose from less than 1% in the 80s to 20% in FY 2005.

Despite the Gurgaon incident, the outlook for FDI inflows in the near-to-medium term remains positive. However, host country factors, such as security and terrorism concerns, are important. There are other fundamental factors factored in by foreign investors. These include: political stability, stability in policies and reduced uncertainties, attractiveness of the Indian market, direction of fiscal, monetary, and exchange rate policy, expected profitability of Indian operations, institutional approvals required, proximity to major markets, laws on repatriation, legal framework, labour laws, availability of infrastructure facilities such as transport, roads, power, water, and communications, availability and quality of manpower and incentives provided by central and state governments.

While the importance of most of these factors is well recognised, they still pose constraints in the Indian context. It would really be the adequate resolution of constraints related to these factors that can further enhance development and FDI. If India can still function and attract FDI even under these constraints, lending too much weight to Gurgaon-type incidents could be an over reaction.

The Gurgaon incident should go down as a learning experience. It would also create an awareness in the industry domestic and MNC that they have to be sensitive towards the genuine expectations and aspirations of the labour force. Effort by both industry and labour is needed to create a win-win environment.

The writer is managing director, Icra Ltd.