Exorcising 1977

Contrast these arguments with actual FDI policy. It is completely open for manufacturing. The door is half open and half closed for infrastructure and services, because there are sectoral equity caps, with some types of proposals on automatic approval, while others are not. India is the only country in the world that uses an oxymoron like “automatic approval”. If clearances are automatic, why use an expression like approval? This case-by-case mindset almost certainly hides a suitcase-by-suitcase intention. Finally, agriculture and, by extension, retail are completely closed. Why don’t we throw open FDI and leave decisions to the market? First, there is the pressure of protectionism from inefficient domestic producers and while this battle may be over for manufacturing, it continues for services. Second, there is apprehension that big bad Western multinationals will distort competition through unfair and restrictive trade practices and we don’t quite believe effectiveness of competition policy instruments. Third, there is the strategic intent of not liberalising unilaterally, because one then misses out on the quid pro quo one might obtain by liberalising multilaterally through WTO. Fourth, it is extremely difficult to overcome the control mindset. So we want FDI, but we want to control the sectors it comes into.

This is the old computer chips versus potato chips argument. The CMP’s version of this control mindset is, “FDI will continue to be encouraged and actively sought particularly in areas of infrastructure, high-technology and exports and where local assets and employment are created on a significant scale.” Perish the thought of leaving such decisions to commercial considerations, and in instance after instance UPA has demonstrated it is much more prone to controlling than NDA was. The bulk of cross-border FDI flows are now in services and if we restrict FDI there, it is not very surprising that India’s FDI inflow figures won’t be that spectacular. This is despite India figuring prominently in the A.T. Kearney FDI Confidence Index, as a preferred destination. UNCTAD’s World Investment Report also ranks India fairly high on the potential FDI index.

Apart from the policy-induced constraint mentioned earlier, there are procedural hassles and these explain why, potential energy isn’t converted into kinetic energy. The Delhi clearance is only the first gate and after that, most clearances are state-level, land, labour, environment, water, power and so on. The red carpet in Delhi becomes red tape in states.

The World Bank’s “Doing Business” and “Investment Climate” databases illustrate some of these problems, at all three stages of an enterprise’s existence, entry, functioning and exit. In all fairness, we follow strict national treatment in procedural hassles. There is no discrimination against foreign investors and domestic investors face the same hurdles, except they probably know how to handle procedures better. It is not surprising that there is great variation across states in FDI figures and in conversion ratios, that is, extent to which FDI approvals are converted into inflows. In actual inflows Delhi and parts of Haryana and UP that adjoin Delhi and Maharashtra are at the top while in approvals Tamil Nadu, Karnataka and Gujarat are also towards the top although the actual rank depends on the timeframe. Initially, most FDI was in consumer goods, since that sector was protected (high tariffs) and because initial investments are lower and returns faster there. But we now also have infrastructure and services, and the tariff-jumping reason has become less important. Indeed, with FATs (free trade agreements), some FDI exit is also possible, such as in the auto sector.

If we don’t reduce transaction costs of doing business, why should FDI come to India, despite locational advantages like availability of labour? There are competing destinations. In 2005, for the first time, FDI out of India exceeded FDI into India, not to speak of acquisitions (companies and brands). While this may signify Indian manufacturing’s coming of age, it also underlines transaction costs. China has an annual FDI inflow of $60 billion, although there are comparability problems. India’s timeline since 1991 has a gradual inching up to between 2 and 3 billion till 1999-2000 and between 4 and 6 billion thereafter. Around 1 billion of this increase is due to reclassification in accordance with IMF guidelines on measuring FDI. The CMP doesn’t quite have a target, but one can presume the government’s target is something like $10 billion a year.

This is eminently doable, provided we remove some cobwebs and implement in India what we promise in Davos. Consequently, India may be everywhere in Davos, but is not significantly anywhere on the global FDI map, with a share of around 0.8 per cent. There is also a general problem of China marketing itself far better than India does. But FDI inflows often snowball and respond to perceptions and signals. Outward FDI also originates with small businesses, which respond to FDI decisions by big business, and India hasn’t yet attracted these. The IBM decision is one such positive signal and one hopes the acronym is not subsequently expanded as IBM’s Big Mistake (IBM).

The writer is secretary-general, PHDCCI bdebroyphdccimail.com