Protected Returns

Updated: Nov 29 2003, 05:30am hrs
The average return on foreign investments may be higher in India than China, but there are no prizes for guessing that China is winning the FDI sweepstakes. Much therefore need not be read into the fact that the secretary, Department of Industrial Policy and Promotion, finds such returns to be higher at 19.33 per cent in India when compared to 14.25 per cent in China and 13.3 per cent in Thailand. These are higher in our country because of the protected economy, while our competitors have relatively more open economies. Paradoxically, the socialist leadership of the dragon co-exists with a capitalist economic regime in which trade liberalisation has made tremendous strides since 1978. Because of higher tariff levels in India, MNCs jumped these barriers to set up shop and earned higher returns. Interestingly, many of these MNCs oppose moves to liberalise imports or enter free trade agreements as, for example, in the automobile industry. If India indeed is so hugely profitable, why arent more people queueing up to invest in this country Yet, Indias officialdom nurtures the delusion that the rest of the world is desperately seeking the Indian market.

FDI instead is seeking China. Annual inflows into the dragon are $45 billion, while only $3-4 bn trickles into India. True, the IFC suggested that this gap is much less than actually thought due to pervasive round-tripping in China while Indias numbers were underestimates. But revising Indias numbers in line with IMF standards has not delivered the expected results either. Cumulatively, FDI into China has amounted to a staggering $480 bn by the end of June 2003 by far the largest that has gone to any emerging economy. Over half of this has gone into manufacturing, where there are fewer restrictions on foreign ownership, according to work done by Nicholas Lardy of

the Institute for International Economics, based in Washington. The important question to raise is whether higher returns in India will persist when our tariff levels converge with those of China. Professor Lardy does not offer much hope in this regard as tariffs on imported manufactured goods in China will drop to 9 per cent in 2005. In sharp contrast, when our Uruguay Round commitments are fully implemented by then, our average tariffs on manufactured goods will still be 32 per cent. So, in all probability, we will continue to show higher returns on investments while FDI continue to torrentially flow into China as before.