Ambivalence on FDI should end to spur growth

‘Growth’is a word that is close to the hearts of many policymakers in the Capital, especially the North Block mandarins.

For, it is the high economic growth and strong macro- economic fundamentals that would help retain foreign investor interest in the Indian economy, especially when global economic environment is not all that great.

But the Central Statistics Office’s advance estimate of five per cent GDP growth for 2012-13 came as a surprise not only to the markets, but also to the Finance Ministry.

After a long time, the CSO and the Finance Ministry were not on the same page.

The reason is not far to see. At a time when the Finance Ministry is keen to encourage more capital inflows, a five per cent GDP growth is likely to dampen the investment sentiment.

The Finance Ministry promptly went on a damage control exercise and sought to punch some holes in the CSO projections — that it is based on past data and does not factor in the signs of upturn seen in the economy since November last year.

For his part, Chief Statistician of India T.C.A. Anant, whose Ministry is in charge of the CSO, stuck to the five per cent projection, stating that it was based on the methodology prescribed by the National Account Estimates.

Past data can always have a bearing on the projection, especially if there is a change in trend. But we cannot do anything about the methodology, Anant has reportedly said.

But the moot point is a five per cent GDP growth or even 5.5 per cent GDP growth is far below potential for a country such as India. This is something that is well recognised even in the corridors of power and articulated by Chief Economic Advisor Raghuram Rajan.

So what should India do to revive growth and sustain foreign investor interest in this market?

One thing it can do is to remove its ambivalence towards foreign direct investment (FDI).

MIT Sloan Management School’s Dean , S.P.Kothari, who was in Delhi a few days ago for a symposium, had a suggestion that the policymakers would do well to follow.

AIM BIG ON FDI

He said that the country should aim for a FDI inflow of $250 billion a year and this could easily help the country get another three percentage point of GDP growth.

How much growth will that add? FDI of $250 billion would generate a growth of $50 billion. It takes $5 of investment to generate $1 growth, give or take.

Annual FDI of about $30 billion when compared to historical number seems large, in absolute terms it seems large, but that amounts to just $25/ person/year, which may not make a huge difference, he pointed out. All the developing countries that have been successful or have become developed countries have had huge FDI, compared to India. So India should shed the fear of FDI and aim for annual FDI of $250 billion. To buttress his point, he took the example of Mexico.

With a population of 110 million people, over the past 20 years, on a per capita basis, Mexico has attracted at least ten times as much FDI as India had.

Mexico’s per capita income is eight times India’s per capita income. So what matters is how much investment is taking place on a per capita basis, according to Dean Kothari.

To complement its skilled labour pool, India has to get the financial capital.

“You cannot have growth only with skilled labour. Introductory micro-economic textbooks will tell you that you need to add right proportion of various factors of production to get the maximum output.”

At the minimum, there is ambivalence on FDI. Going by the output of FDI in the last two decades, it is more than ambivalent.

It is common to compare China and India — China gets $200 billion/. Of course, achieving $250 billion a year will be a huge challenge for India.

It can’t be achieved overnight. How can this be achieved?

It is something everybody should start thinking about, especially policymakers.

What would it take for me to attract people to invest? That is the right kind of question a businessman asks. If I want to sell my product, what would I have to do to make it attractive for customers to buy my product?

If you want to reach into people’s pocket and get some money out of their pocket and make them feel good about parting their money, then you never ask what should I do?

Invest in infrastructure, good law enforcement, business-friendly regulations and finally ensure educated public.

All of these are needed as policies geared towards improving these dimensions, so that measurable target of $250 billion/year will be achieved.

Literacy rate has to move a lot faster if India wants a rightful place in the new economic world order, according to Dean Kothari.

An uphill task, definitely. Will India measure up to it?

Srivats.kr@thehindu.co.in

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