The Hindu Business Line : India retains the flavour, still

For the past month a negative sentiment has been building up in the economy with the declining Sensex accompanied by a perception, as the Foreign Institutional Investors pull out, that India is losing its flavour. A look at the underlying fundamentals, especially in the organised sector, suggests that the real economy is still clipping along at a fair rate, that the global outlook on India is positive and that an 8 per cent growth is a distinct possibility. The latest data for industrial production for April reflect a pick up in manufacturing growth to 10 per cent compared to 9.2 per cent 12 months ago with the overall Index of Industrial Production clocking 9.4 per cent against 8.1 per cent in April 2005. Particularly heartening is the capital goods industry posting a growth of 24 per cent in April and the minerals sector, usually a laggard, also perking up in April compared to 12 months ago.

All in all, this is an auspicious start for the new fiscal and almost seems like a fitting response to the Prime Minster's call to industry made last December to boost production and through that employment. Given this record of industrial growth, there is, understandably, disappointment at the reverse flow of portfolio investments as FIIs pull out of the equity market. But the economy, and policymakers particularly, should take heart from a refreshing trend in foreign direct investments. Across industries — automobiles, steel, pharmaceuticals, consumer durables and FMCGs — Indian subsidiaries of multinational corporations are far outstripping their counterparts round the world in terms of sales; in some cases by four times. A significant aspect of this development is that it is not restricted, as it used to be, to the IT sector. For MNCs across the spectrum be they ABB, Unilever or Colgate, India is keeping their cash registers ringing. Analysts say that more than 70 per cent of MNC's Indian operations are profitable, to say the least.

These trends reflect a maturing of the Indian market for goods and services, on the one hand, and an integration with the global manufacturing practices, on the other. The former benefits consumers and the latter contributes to productivity of domestic industry. Both represent tangible benefits of global capital and offer proof, if any were needed, that purely enabling policies work as well as, if not better than, mindless giveaways such as tax breaks as evident in the framework of the Special Economic Zones. For two decades, attempts to reduce transaction costs, create transparent procedures, abolish multiple permission windows and formulate unambiguous views on the kind of foreign investments the country needs have paid dividends through expanding markets and higher industrial growth. The world over companies are drawn to economies governed by open and transparent laws, prudent governance, and inhabited by a population with disposable incomes. India has been no exception.

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