Foreign direct investment will naturally flow towards better business environments and competitively priced skills.

It is an accepted fact that India needs huge investments to fuel economic growth. Massive funds are required for a range of sectors including food, health, education, energy and infrastructure. One of the biggest challenges for the country is to find adequate funds for investment. Investor confidence, quite obviously, is the key to attracting investment. In this context, the report ‘World Investment Prospects to 2011’, recently released by The Economist Intelligence Unit (EIU) and the Columbia Programme on International Investment (CPII), should help our policy-makers take note of the global perceptions about India. Although India has been attracting global attention following its emergence as one of fastest growing economies (GDP growth rate of over 9 per cent), flows of foreign direct investment are, and will be for some time, just a trickle in global terms. This is in spite of the informed expectation that global FDI flows over the next five years will be pushed up by buoyant growth, competitive pressures and improvements in the business environment in most countries. Global FDI flows are projected to return to steady growth in 2009-2011 and to reach $1.6 trillion by 2011.

Despite the strong growth in inflows that India saw in 2005-06, a critical mass in FDI is still to be created, so much so that the EIU believes the government’s target of $25 billion for fiscal 2007-08 is unlikely to be met; this, despite India’s vast potential and recent government measures to attract FDI. Persistent business environment problems are seen as hindering fund flows.

The report points out that FDI flows may be restricted because of political resistance to privatisation, inflexible labour laws and poor infrastructure. And that excessive bureaucracy and inter-departmental wrangling will slow the opening of many sectors. The infrastructure, energy, telecom, IT and insurance sectors are likely to be the main magnets for FDI. Producers and assemblers of cars and automotive components are re-evaluating India’s potential, as also biotechnology firms. These are positives. But there is urgent need to generate a political consensus to address the FDI issue, keeping in mind ambitious growth targets. FDI will naturally flow towards better business environments and competitively priced skills. Sharper global competition will force companies (foreign investors) to seek lower-cost destinations. Therefore, the need to invest in developing human resources, in addition to investor-friendly policies, cannot be overemphasised.

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(This article was published in the Business Line print edition dated September 28, 2007)
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