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Bharat Jhunjhunwala

THE PRIME MINISTER, Dr Manmohan Singh, has put all his energies in further opening the country for foreign investments in banking, insurance, telecom and civil aviation. He seems to believe that `capital-scarce' India will be liberated from the bondage of underdevelopment by foreign capital inflows. But he is chasing a mirage. There is little chance of India attracting large amounts of foreign investment. On the contrary, the signs are that India is emerging as a major source of FDI.

The global scenario for foreign investment is turning bleak. Unctad (United Nations Conference on Trade and Development) has indicated in its World Investment Report 2004 that the global FDI flows have seen a sharp decline of 37 per cent in the last two years. Thus it will be difficult to attract large quantities of FDI.

Second, FDI flows between developing countries is on the rise. Unctad quotes a study to the effect that "by the end of the decade, more than one-third of the FDI in developing countries originated from other developing countries... South-South FDI flows appear to have grown faster than FDI from high-income countries to developing countries in the late 1990s, and have remained relatively more resilient in the post-Asian crisis period as well." Unctad says that South-South FDI is being propelled by similarity in culture among neighbours.

Korean companies have invested in Kazakhstan and Chinese in East Asia. Free trade agreements among the developing countries are also helping. India will invest larger amounts in the coming period as it is more developed among the developing countries. While world FDI has contracted, outflows from India have remained stable.

The outward FDI from India is rising, while inward FDI into India is facing difficulties. Unctad has ranked inward and outward FDI performance in various countries. India's Outward FDI Performance ranking has improved from 94 to 61 while Inward FDI Performance ranking has marginally declined from 113 to 114. India's Inward FDI Potential ranking has only marginally improved from 94 to 89. This shows that outward FDI from India is where action lies in the future.

Rankings in FDI Indices

Interestingly, China is moving in the opposite direction. Outward FDI from China has declined by 44 per cent, in line with the global decline of 37 per cent. China's Outward FDI Performance Ranking has deteriorated while India's has improved. These rankings show that while India is emerging as a source of FDI, China is losing its grit.

Truly, Indian businesses appear to have gained international competitiveness during the last decade of reforms. Dr Manmohan Singh had wanted to speedily open the country for FDI during his stint as the Finance Minister. At that time, his efforts were thwarted by the opposition from the Swadeshi brigade. Consequently, Indian businesses have got the breathing space necessary for attaining global competitiveness.

Foreign investors have few management techniques and technologies that are not available to Indian businesses. Foreign capital too is available to Indian businesses through large FII flows. Hence, there is little chance of India receiving large amounts of FDI even if Dr Manmohan Singh succeeds in opening the country fully to FDI. It is questionable whether FDI is needed for economic success. Information Technology is a case in point. According to Unctad, "India's share of the global market for offshore IT and IT-enabled services was estimated at 25 per cent — second only to Ireland — while for offshore IT-enabled services only the figure was as high as 67 per cent. According to estimates by Nasscom, the market for IT-enabled services will continue to grow fast and could be worth $17 billion by 2008.

Did FDI contribute to this success? Unctad says that foreign companies such as Nortel and Texas Instruments did contribute in the initial periods. However "FDI has not been a dominant feature. In 2002, foreign affiliates accounted for 20 per cent of total export revenues in the software industry...

Today, leading Indian companies (Tata Consultancy Services, Infosys Technologies, Wipro Technologies, Satyam Computers) are on a par with, or even ahead of, many of their foreign rivals in terms of profitability." Indian companies have emerged victorious in the IT sector. Most foreign investors in telecom and power sector have also exited the country. May we not expect the same story to be repeated in banking and insurance sectors? Dr Manmohan Singh should focus on improving domestic savings and government administration instead of wooing foreign investors.

(The author is a New Delhi-based freelance writer. He can be contacted at bharatj@nda.vsnl.net.in)

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