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G. Srinivasan

IFC argues that the adoption of standard computation would raise India's net FDI inflows from $2-3 billion a year to about $8 billion, while China's inflows, net of round-tripping, are about $20 billion, against the much-ballyhooed $40-45 billion.

NEW DELHI, June 6

FOR people inured to making inescapable comparison between China and India and extolling Chinese success in attracting foreign direct investment (FDI) as against India's mixed record in this regard, it would be too strong a jolt that there is fundamentally "not a huge difference" between them in wooing FDI.

This is precisely what a recent study by the private sector lending window of the World Bank, the International Finance Corporation (IFC) has come out with. Naturally, the mandarins in the Department of Industrial Policy Promotion (DIPP) are overtly happy over the contents of the IFC study, which came close on the heels of the hullabaloo raised by the alleged fudging of statistics by the Chinese authorities as reported in reputed magazines.

The IFC study has posed a teaser as to whether the FDI numbers trotted out by China are right? This is presumably because of round-tripping: nearly 50 per cent of total FDI flows in 1999 and 2000 (Global Development Finance, World Bank, 2002). IFC contends that this reduces net FDI inflows from about $40 billion to about $20 billion.

Stating that "something is very wrong with official numbers" of FDI into India ($2-3 billion/year), IFC advances Citibank's $400 million, Coke and Pepsi's $1.3 billion investments with many other foreign players lining up for setting up shops either as 100 per cent fully-owned subsidiaries or as joint venture partners with domestic companies as examples of rising tide of FDI.

Having said this, IFC has not refrained from the glaring lacunae in India's method of measuring FDI. It said India's FDI statistics don't conform to IMF standards. Besides, it excludes reinvested earnings, subordinated debt, overseas commercial borrowings; all included in other countries' FDI statistics. The proposed new classification by the RBI and DIPP might alter this abysmally low estimation it is hoped.

IFC forcibly argues that the adoption of standard computation would raise India's net FDI inflows from $2-3 billion a year to about $8 billion, while China's inflows, net of round-tripping, are about $20 billion, against the much-ballyhooed $40-45 billion. On that basis, IFC surmises, FDI represents two per cent of China's GDP and 1.7 per cent India's GDP which incidentally is "not a huge difference" to gloat about.

Other highlights of IFC deserve mention. While China's PPP (purchasing power parity) GNP is at $5,000 billion and that of India's $2,500 billion, IFC states that companies might be lured in by PPP numbers, but sales are at market prices and profits are remitted at current exchange rates.

Citing a World Business Environment Survey (WBES) made in 1999-2000 in 80 countries plus one territory covering 10,000 firms in manufacturing, service, agriculture, construction, which are mostly small but also medium and large, IFC said this survey showed that China is better than India "although neither climate is anything to write home about."

In terms of obstacles, anti-competitive practices and financing are viewed as China's weak spots, whereas India has a host of hampering factors ranging from corruption, exchange rate, inflation, political instability or uncertainty, infrastructure to taxes and regulations, functioning of the judiciary and organised crime. Again, in terms of regulatory obstacles, the Chinese are faulted in tax administration regulations and high taxes, whereas India is at fault in a spate of areas such as high taxes, fire regulations, environmental regulations, labour regulations, customs regulations and business regulations.

An interesting feature in the IFC survey pertains to economic freedom index in which China scores better than India only in macro management and low taxes. But India scores better than China in degree of government intervention, treatment of foreign investment and respect for property rights. This might warm up the authorities that their efforts to simplify procedures and cut unwanted procedural tangles are being recognised, though their translation into higher FDI flows into India might wait for some other roadblocks to be removed and second generation of economic reforms meaningfully energised.

However, what is significant to note is that an internal IFC survey (foreign investor survey) has found that "business environment in India to be better than in China" based on a few important parameters. While the main business risks in China encompass legal and regulatory infrastructure for financial institutions, bankruptcy law and commercial law enforcement, the main business risks in India are set out as corruption, commercial law enforcement and slowness, opacity of bureaucratic decision-making in that order.

As the rich countries club, OECD said very recently on a comprehensive survey of China, effective and thorough implementation of China's WTO commitments would be critical to its success in achieving its potential in luring FDI. Besides, China's success would rely on its ability to carry out complementary reforms, to further reduce trade and investment impediments and to open up domestic markets, to improve the performance of state-owned enterprises, to better protect intellectual property rights and to beef up competition and judicial enforcement that are essential to the effective functioning of China's markets. These reforms are no less important and urgent to India now as they are to China if the underlying objective is to be a safe investor destination.

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