The Hindu Business Line : World Investment Report 2005 <br>India: Not quite yet the investors' darling

China has once again emerged as the darling of investors among developing economies worldwide. For analysts drawing comparisons with China's stupendous FDI performance, India's might seem a poor record. Unless the UPA Government convinces its allies of the need for foreign investment, India's dream of locking on to a high growth trajectory will remain just that. This, says G. Srinivasan, is the lesson for India from the latest World Investment Report.

THE WORLD Investment Report (WIR) by the UN Conference on Trade and Development (Unctad) has brought to the fore attempts by various countries to attract foreign direct investments (FDI) and identified the shortcomings of those that have been unsuccessful in wooing investors.

The 2005 WIR, the leading document on FDI by the Geneva-based trade body, notes at the outset that 2004 saw a slight rebound in global FDI after three years of plummeting flows. At $648 billion, world FDI flows were 2 per cent higher in 2004 than in 2003. While flows into developing countries surged by 40 per cent to $233 billion, developed countries as a group experienced a 14 per cent drop in their inward FDI. As a result, the share of developing countries in the world FDI flows was 36 per cent, the highest since 1977.

Even as world FDI inflows posted a modest growth, FDI outflows rose last year by a hefty 18 per cent to $730 billion, with firms based in developed countries accounting for the bulk ($637 billion). Almost half of all outward FDI originated from the US, the UK and Luxembourg, in that order. Developed countries as a group remained significant net capital exporters through FDI: Net outflows exceeded net inflows by $260 billion.

While FDI outflows from the European Union (EU) declined by 25 per cent to $280 billion, a seven-year low, most other developed countries increased their investments abroad. In the case of the US, the outflows increased by over 90 per cent to $229 billion, a record high.

The stock of FDI in 2004 is estimated at $9 trillion. It is ascribed to some 70,000 transnational corporations (TNCs) and their 6.90 lakh affiliates with total sales by the latter amounting to almost $19 trillion. Interestingly, the pace at which the top 100 TNCs are expanding globally appears to have slowed down. Although their sales, employment and assets abroad rose in absolute terms in 2003, their relative importance declined somewhat as activities in the home countries expanded faster.

Stating that the upturn in global FDI was marked by pronounced differences between countries and regions, the Unctad report says that Asia and Oceania were again the top destinations in the developing regions. They attracted $148 billion of FDI, $46 billion more than in 2003, marking the largest increase ever.

China remained the darling of investors as it was the largest recipient of FDI inflows, not only among countries in the region but also among developing economies worldwide. FDI into China touched another record of $60.6 billion. Flows into Hong Kong, China, amounted to $34 billion, up 150 per cent and the highest investment growth rate among the region's economies. Together, China and Hong Kong accounted for two-thirds of all FDI in this part of the world.

For analysts drawing comparisons with China's stupendous FDI performance, India's might look a poor record. Unctad put it somewhat mildly when it said that even as FDI flows to South Asia climbed in 2004 for the fourth consecutive year, inflows to India — at a record $5 billion — were encouraged by an improving economic situation and a more open FDI climate. What Unctad left unstated is the presence of the policy instability for investment into India.

Thus, even as the United Progressive Alliance (UPA) Government gave the green signal to a greenfield steel project by the Korean steel giant Posco, in Orissa, a couple of months ago, the National Advisory Council, headed by UPA Chairperson, Ms Sonia Gandhi, took opposition to it. This will send a wrong signal to other foreign investors about India's commitment to safeguarding their interests.

With growing opposition to foreign investment in retail and to modernisation of airports and with the Investment Commission remaining a non-starter, New Delhi may have to come up with some out-of-the-box ideas to get foreign investors to put their money here.

Contrast India's glacial pace of reforms with China's and one will understand why investors are attracted to the Middle Kingdom despite the absence of democracy there.

According to the Unctad report, China's Catalogue for the Industrial Guidance was revised in November 2004 to include commitments on account of accession to the World Trade Organisation. A number of industries have been added to the "encouraged" category, while some have been moved to the "permitted" list to control investment overheating of the economy.

China is further opening up its services sector to foreign investment by liberalising rules on FDI in financial and distribution services, media and education.

In particular, stringent qualifications, ownership restrictions and geographical limitations previously imposed on FDI in distribution services such as wholesale, retail and franchising have been removed.

If a communist country can open up the hitherto closed parts it is unfortunate that a democratic government here is finding resistance from within and without for even modest opening up of vital sectors to FDI. FDI not only brings in money, but also technology and best managerial practices for domestic firms to emulate.

What is particularly noteworthy is that the National Economy and Social Development Plan 2005 emphasised the need to improve the quality of FDI by encouraging it in high-technology industries, advanced manufacturing, modern services, agriculture and environmental protection. The plan encourages the establishment of R&D centres, regional headquarters and bases of advanced manufacturing. It also welcomes the participation of foreign investors in the reform of state-owned enterprises.

The internationalisation of Chinese enterprises is continuing also through investments outside Asia. Significant investments are planned in natural resources (mainly in Latin America), steel (in Brazil) and real-estate (in the Russian Federation). Recent appreciation of the Chinese currency may contribute further to the increase in Chinese outward FDI.

Of late, Indian companies have made solid outward investments in China, Korea and Central Asia. In 2004, such outward flows amounted to $2.2 billion, in contrast to China's $1.8 billion. But China's inward flows last year were $60 billion while that of India's a meagre $5.3 billion — a clear reflection of the foreign investors' continued faith in the Chinese medicine for better return on investment. Unless the UPA Government convinces its allies of the need for foreign investment in order to improve the social and physical infrastructure, India's dream of locking on to a high growth trajectory will remain just that. This is by far the message of 2005 WIR for India. The sooner this is realised the better it will be for the country.

There should be more reforms and openness and not a slowdown or a withdrawal of what has so far been painstakingly carried out to put India in the league of emerging economies of the world.

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