That India has a domestic resource constraint is not disputed by anyone. Even though the gross domestic savings and gross domestic capital formation rates have increased to 32-33% in the last couple of years, to sustain the desired 9-10% rate of GDP growth, we have to rely on foreign savings to bridge the domestic investment-saving gap.

With an incremental capital-output ratio (Icor) of about 4, and a desired rate of GDP growth being 9% at least, an investment rate of over 36% is required. A 2-3% (of GDP) contribution of foreign savings, therefore, is critical for sustaining the Indian economy?s growth. Here, we are talking about foreign direct investment (FDI) and not foreign portfolio investment, which is currently hogging the headlines.

Even the Left is no longer against FDI per se, but only against allowing it into certain sectors. The infrastructure sector is in desperate need of massive infusion of funds and the nationality of funds should not agitate anyone.

The last financial year was a watershed in terms of FDI inflows, which reached a record level of $19.5 billion. In comparison, the inflows in 2000-01 and 2005-06 were $4 billion and $7.7 billion, respectively. In 2006-07, out of the total inflows, equity investment was $16 billion, a growth of 176% over the previous year. Acquisition of shares of Indian companies by non-residents also jumped by 188%, from $2.1 billion in 2005-06 to nearly $6.3 billion in 2006-07.

In terms of industrial composition of FDI, financing, insurance, real estate and business services have shown a significant jump by attracting $4.4 billion in 2006-07 as compared to $452 million in 2005-06. FDI inflows into the manufacturing sector have risen by 28%, reaching $1.6 billion in 2006-07. Construction and computer services are the other two sectors which have received significant inflows, $968 million and $823 million, respectively.

The geographical composition of FDI in terms of countries-of-origin shows that for the first time, the UK has dethroned the US as the largest investor in India in 2006-07. Inflows from the UK reached a level of $1.8 billion in 2006-07 as compared to $706 million from the US. Though, according to the data, Mauritius is the largest investor in India (about $3.8 billion), it is being primarily used as an offshore financial centre. Other major investors in 2006-07 included Singapore ($582 million) and the Netherlands ($559 million).

What is indeed heartening is that the low percentage of FDI coming through the automatic route has reversed in the last three years, and an increasing share of FDI proposals are now not subject to case-by-case approval of the Foreign Investment Promotion Board (FIPB). As much as 61% of the equity investment in 2000-01 was through the FIPB route and only 19% through the automatic approval route. In 2006-07, 45% was through the automatic route and only 13% through the FIPB route.

With India on its way to becoming a major player in the global economic arena, exports and imports are increasingly becoming a major part of our economy. Merchandise exports and imports together now account for more than 30% of India?s GDP. If services, other invisibles and foreign investment are all added to this, more than half the country?s GDP has an external dimension. Meanwhile, Indian companies are going global. Take overseas acquisitions. From $4.5 billion in 2005-06, India?s direct investment abroad shot up to $11 billion in 2006-07.

The size and growth potential of the domestic market, locational advantage in terms of efficient access to regional markets, natural and other resources, are big determinants in attracting FDI inflows. Additionally, the availability of specialised labour skills and other such created advantages are also becoming important. But all of these only come into play once the host country?s FDI policy is fully attuned to a globalising world economy.

Therefore, though we have come a long way in terms of our FDI policy in the last 10-15 years, we now need a more forward-looking and transparent FDI policy with long-term objectives and with minimal mid-course policy changes to boost the confidence of foreign investors. We need to liberalise the FDI policy, lift sectoral caps in a comprehensive manner, and keep this structure stable.

In addition to political considerations, there are some justified concerns about FDI, and the government must decide which sectors must be totally barred to foreign investment in the national interest, allowing 100% equity FDI through the automatic route in all others.

Simultaneously, we must also focus on the implementation and trickle-down of reforms to operative levels. Though policy barriers have been progressively removed, administrative barriers, especially at the level of states, continue as impediments to greater inflows of FDI. Delays in project implementation and administrative decision making persist in many sectors.

We also need a better focused approach to attracting FDI of the type that is export-oriented. To make India a global manufacturing hub for exports, we need international scale of operations that FDI brings to a country.

?The writer is joint secretary, PHD Chamber of Commerce and Industry. These are his personal views