The Hindu Business Line : For more growth, get more FDI

Recognising the importance of foreign direct investment for economic growth, India has, among other things, entered into free trade agreements with Singapore and Thailand. Though the initiatives are on the right track, it remains to be seen whether investments will actually rush in, says T. C. A.Ramanujam.

The success of our project in Orissa will demonstrate to the world that there is a multi-billion opportunity to build Indian infrastructure. We hope to contribute significantly to India's rapid economic development.

— Chairman & CEO, POSCO

A RICH nation inhabited by poor people is how India has been described for more than a century. Even today, much of the resources remain un-harnessed for want of investment. Though the savings rate is around 24 per cent of GDP, the investment rate is only 23.3 per cent, leaving a resource gap of 0.9 per cent.

On the other hand, China with a savings rate of 42.7 per cent of GDP is able to invest at 44.4 per cent and Sri Lanka with a mere 15.7 per cent savings rate manages an investment rate of 24.1 per cent. Despite the liberalisation measures initiated since 1991, the phenomenon of low investment continues. The investment gap has to be filled and quickly too.

The country's intellectual capital often gets exported, especially to the US where a number of non-resident Indians (NRIs) have made a mark in several technological areas.

Srinithi Varadarajan, for instance, built the world's third fastest computer for a mere $5 million by linking computers and pooling their power — a computer of this speed would otherwise have cost $100 million. Anand Natarajan has devised an implantable cardiac device to detect incipient heart attacks.

In financial terms, however, the flow of resources in the form of FDI is far short of what is required.

Foreign direct investment

As can be seen from Table 1, India ranks low among the hot destinations for foreign direct investment (FDI). In his Budget Speech of 2005-06, the Finance Minister, Mr P. Chidambaram, observed: "On foreign direct investment (FDI), I would urge Members to take a pragmatic view.

At the recent meeting of the Finance Ministers of G-7 countries, to which India and China were invited, the Finance Minister of China looked in my direction and told the gathering that China had received $500 billion worth of foreign investment since China opened its economy in 1980.

Of this, nearly $60 billion came in calendar 2004.

"Our own experience has been that the automobile, software, telecommunication and electronic sector have benefited from FDI and have assimilated themselves into the global production chain.

I believe that there are opportunities in other sectors as well, such as mining, trade and pensions. Government will, after due consultation, come forward with suitable proposals."

How China succeeds

Almost all China watchers agree that its economic growth has been the result of huge FDI inflows. China has not liberalised the way India has, and allows foreign investments only through joint ventures with local companies. Yet, it has grown at an aggregate of 9 per cent. Explanation for this can be found in the approach to FDI by the two countries:

While China attracted FDI mainly into the export-oriented sectors, India's was largely for the domestic market.

The Chinese Diaspora accounted for 70 per cent of FDI flows into China, through Hong Kong and Taiwan. But the NRI community generally prefers to invest wherever the returns are safe and high, and not necessarily in India.

Problems of infrastructure and connectivity exist in both the countries, but China tackles these faster. China's tele-density is 16.70 fixed lines and 16.10 mobiles for every 100 persons against India's 4.50 and 4.73 respectively.

China has been able to cut red tape. It is pointed out that a typical power project in India requires 43 Central- and 57 State-level clearances.

CECA with Singapore

In this context, the recently concluded Comprehensive Economic Co-operation Agreement (CECA) with Singapore is welcome though that country is said to be discriminating against India vis-à-vis the US in such matters as full banking licence, insurance intermediation, foreign currency dealing, and so on.

The agreement covers an investment protection pact which, it is hoped, will boost FDI into India to around $2 billion in the first year and FII flows by 300 per cent to $5 billion.

India's Double Taxation Avoidance Agreement (DTAA) with Singapore is now modelled more on the lines of the existing treaty with Mauritius, with exemption for capital gains tax on profits from sale of shares built into the agreement.

Mauritius has been contributing substantially to India's FDI (Table 2) and this is in no small measure due to the "treaty shopping" made possible through the DTAA with that country. But this has attracted wide criticism because of the free, unchallenged residency rules.

To restrict the tax benefit only to bona fide Singapore businesses, the CECA prescribes a minimum threshold and proof of actual operations for beneficial treatment. Round-tripping of investments by Indian companies through Mauritius and other tax havens such as Bermuda and the British Virgin Islands may not happen as safeguards are built into the Singapore treaty. Singapore will probably turn out to be India's Hong Kong and there could be a shift in FDI from Mauritius to Singapore.

The free trade agreements (FTAs) with Singapore and Thailand show India's concern for getting integrated with the East Asian economies.

India is already a member of the Asean (Association of South-East Asian Nations) Regional Forum and is trying to spread its wings in East Asia so as to create the largest free trade area, bigger than even the EU-NAFTA combined.

The Framework FTA with Asean will push bilateral trade from $13 billion to $30 billion by 2007.

The Posco deal

History was made when one of the poorest States bagged the country's largest ever FDI. South Korea's Pohang Steel Company will invest $12 billion in Orissa for exploiting its rich iron-ore resources.

The project will get SEZ (Special Economic Zone) status. A steel plant, a big port and a captive power plant, along with a township, will come up.

Large-scale direct and indirect employment will be generated in the State and the tax revenues will also go up both for the Centre and State when the project is commissioned.

The Rs 52,000-crore, 12-million-tonne steel plant coming up at Paradip will give a boost to the economy of this poor and neglected region.

The initiatives to attract FDI are on the right track, and it will be interesting to see whether investments actually rush in.

(The author is a former Chief Commissioner of Income-Tax.)

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