`Despite improvement in India's policy milieu, FDI interest remains rather narrow even in promising fields such as IT.'

G. Srinivasan

New Delhi, July 7

THE significant role of FDI in supplementing domestic resources and in ensuring employment generation in the development of an economy is unquestionable.

Yet, in a coalition Government, the parties supporting from within and without raise their hackles if the principal ruling party proceeds to open up one sector or the other for FDI even as the compulsions of integrating domestic economy into world economy demand such a course of action.

In an incisive monograph on `India and the Knowledge Economy', just released, the World Bank maintains that even as India's economy has made real progress, further liberalisation would be required to sustain its growth.

While the Bank detects some improvement in India's policy milieu, multinational FDI interest remains rather narrow even in promising fields such as IT and communications technology.

India has not attracted anywhere near the amount of FDI that China has.

Commentators note that this disparity reflects in part the confidence global investors have in China's prospects and their scepticism about India's commitment to free market reforms.

Here the irony is not lost on observers who contend that while communist China is able to ramp up support for its circumspect admixture of Marx and market, the indigenous communist parties in India continue to raise roadblocks in opening up of the economy to FDI. Listing out various plus points in the Indian economy, such as democracy, a tradition of entrepreneurship, a decent legal system, and improvement in corporate governance, the study poses the pertinent query - If India has so clearly surpassed China at the grassroots level, why is its superiority not reflected in the numbers?

Part of the reason might be that India's economic reforms only began in earnest in 1991, more than a decade after China began a liberalisation blitzkrieg. India has had to make do with a national savings rate half that of China's and 90 per cent less FDI.

Incidentally, the Bank for International Settlements in its latest annual report states that China's savings rate is close to 50 per cent.The study lists various reasons for the continued caution of foreign investors.

"Structural impediments to investment in India have been eased but not removed; they include restrictive labour laws.

Despite improvements in some areas, the deficiencies in India's infrastructure - roads, electricity and water supply - have not been fixed.

Laws complicating land transactions and the labyrinthine intricacies and glacial pace of litigation are further deterrents."

Be that as it may, China's accession to the WTO in 2001 has led to more FDI in services.

China has allowed 100 per cent foreign equity participation in such industries as leasing, storage and warehousing, and wholesale and retail trade.

The country is all set to provide 100 per cent foreign equity ownership in advertising and multimodal transport services by 2005, insurance brokerage by 2006, and transportation of goods (railroads) by 2007.

In retail trade, China has already attracted FDI from nearly all the big names in department stores and supermarkets, such as Carrefour, Makro, Metro, 7-Eleven, and Wal-Mart.

Indian authorities find stiff resistance to opening up retail from allies and adversaries, even though FDI in this segment would help improve supply chain operations domestically and creating hordes of job opportunities, besides lower prices for consumers across the country.

In prescribing ways to attract FDI, the World Bank said that the Government should first lower duties on capital goods and inputs and then, in several years, reduce them on finished goods.

Foreign ownership restrictions should also be lifted throughout the economy as well, save in strategic sectors, notably Defence.

Currently, foreign ownership is not only prohibited in industries such as agriculture, real estate, and retailing, but limited to minority stake in many others such as banking, insurance, and telecommunications.

The Bank reckons that 40 million people now look for work in India with an additional 35 million joining the labour force in the next three years.

Hence, the time to expedite essential economic reforms is never so pressing as it is today.

(This article was published in the Business Line print edition dated July 9, 2005)
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