The Hindu Business Line : FDI inequalities

The Indian economy provides eloquent testimony to the old adage that nothing succeeds like success. Consider the data for the first half of this fiscal for foreign direct investment (FDI). Between April and September, FDI inflows were $4.4 billion, twice the quantum that came in over the same period last year. Much of the investments are from Singapore, which is replacing the US and UK as the major source of inflows. Many are `first-mile investments', which means that more will have to come in to transform the capital into productive assets. But as the Commerce Minister, Mr Kamal Nath, noted: "India is on the radar of global investors and the data reflect their confidence in the Indian economy." The pity is that only some States in the country are on the FDI radar screen.

Predictably, just five States garner almost all the FDI each year with one or the other getting the lion's share. This time, the New Delhi region attracted the highest investments, followed by Maharashtra, Tamil Nadu and Puducherry, Gujarat and Andhra Pradesh. Within the States, FDI flowed into the regions in and around the metros — New Delhi, Chennai, Mumbai, Ahmedabad and Hyderabad. So, even while the increase in FDI is welcome, its concentration in some pockets is not. Policymakers must now concern themselves with the fact that high-value investments are piling up in islands of rapidly expanding development (and high disposable incomes) while the rest of the hinterland slumbers in backwardness and poverty.

The real danger of deepening regional inequalities is already upon us in the form of demands for job quotas and other revivalist tendencies that could form insurmountable roadblocks to sustained growth. Backward States too need FDI but that can come about only if there is a change in the perception of them as failures. The most tempting way of doing this is to provide tax incentives and exemptions. Such States as Uttaranchal and Himachal Pradesh have indeed drawn once-unlikely investors to their fold on the strength of the Centre-granted tax break. But these new ventures cannot sustain for long if the infrastructure does not improve in concert, nor do they necessarily mean more jobs for locals. The challenge has to be met with a more concerted effort. The backward States first need to pull in funds, whether private or public, into improving the social and physical infrastructure even as they commit themselves to maintaining a modicum of law and order, at least by the standards of the developed States. They would need to win the vote of the domestic investor even before they entertain dreams of an avalanche of FDI.

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