The Hindu : Opinion / Editorials : ATTRACTING FDI, CHINESE STYLE

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Wednesday, Dec 08, 2004

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ATTRACTING FDI, CHINESE STYLE

TIME AND AGAIN, successive Governments and their leaders have been shouting from the rooftops about the need to tap more Foreign Direct Investment in core sectors, above all infrastructure. Despite the fairly high Gross Domestic Product growth over the past decade, India has not been able to mobilise anything like the kind of FDI — or domestic investment — needed to build world-class infrastructure. This is seen to be a necessary, though insufficient, condition for putting the economy on an 8 per cent-plus GDP growth path. Finance Minister P. Chidambaram has used the India Economic Summit platform to make the appropriate appeal. From a level of $2 billion to $3 billion a year, FDI annual inflow into India has touched $4.7 billion. For an economy of India's size, given the huge investment requirements in core areas such as telecommunications, highways, power, mining, airports and seaports, this is still minor league. Consider the stunning achievement of China. It has been able, in recent years, to attract FDI to the extent of $50 billion a year. It overtook the United States in 2003 as the world's largest recipient of FDI, and expects to achieve a level of $100 billion in every year of the 11th Five Year Plan (2006-10).

India needs to set itself a target of at least $15 billion a year to move forward decisively. While the number of Foreign Institutional Investors and their interest in Indian stock markets has grown, FDI has lagged behind. The swift pace of reforms in the telecom sector has no doubt brought in substantial investments and technology, but this has not happened in other areas. The power sector stands out as a monumental failure in terms of both reform and wooing private investment, foreign and domestic. The so-called fast track projects of the early 1990s were poorly conceived, non-transparently executed, and brought disrepute to the whole process. The system is still paying a heavy price for the Dabhol-Enron debacle in Maharashtra. Basically, it was the absence of a sound regulatory framework and transparency governing the negotiation of power purchase agreements with foreign investors — who were assured very high returns at the cost of State Electricity Boards and consumers — that led to the fiasco.

It is not enough for the Centre to woo investors. State Governments must accept the task with both hands. Despite India's political diversity and sharp inter-party differences on certain issues, the Centre and the States need to work in tandem to create attractive investment destinations. Take the case of highways. The Centre can handle Build Operate Own and Transfer (BOOT) projects for the National Highways while the States can work out policies rapidly to develop the rest of the highway network. With private investment, domestic or foreign, tolls will become the order of the day. Many States feel this will be unpopular. Some States, notably in the west and south of the country, have done very well in developing infrastructure and attracting FDI. But all this is only a fraction of what is needed to achieve Chinese-type rapid industrial expansion, world class infrastructure development, increased trade, and higher levels of growth. Prime Minister Manmohan Singh's target of securing $150 billion FDI in 10 years is not beyond reach but it asks for tremendous work from the system. The Investment Commission headed by a highly respected captain of industry, Ratan Tata, certainly has its work cut out. On top of new, out-of-the-box thinking on how to narrow the FDI gulf between China and India, a critical mass of attractive and feasible project proposals must be developed for potential investors to choose from.

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