When comparisons are drawn between China and India's levels of growth, the first criterion used to quantify them is the volume of foreign direct investments, a yardstick by which China usually beats India hands down. Is it any surprise that the need to ramp up FDI has become an article of faith among most policymakers and analysts, who view the efficacy of policy by FDI inflows at any given time?

Three years ago, a paper by Ramkishen Rajan, Sunil Rongala and Ramya Ghosh, Attracting foreign Direct Investment to India , summed up this position: “A high level of FDI inflows is an affirmation of the economic policies that the policymakers have been implementing as well as a stamp of approval of the future economic health of that country.”

In no sector has the need for FDI been more urgently felt than infrastructure. The Planning Commission doubled the 11th Plan requirements to $513 billion and asked Mr Deepak Parekh to find ways of getting that cash.

The committee he headed submitted its report last year and explored the long-term debt route to infrastructure financing; though it did not specify foreign direct investments as such, the notion that foreign capital would play a crucial part even through debt was intrinsic to its innovative approach.

Right now, Parliament is still grappling with the relative positions on allowing FDI in retail trade, but the Prime Minister's Economic Advisory Council last month jumped the gun, suggesting 49 per cent FDI in every segment except the negative list as the most effective booster shot for a pick-up in growth through higher investments.

ADVERSE GLOBAL CLIMATE

It could not have chosen a worse time; FDI has not picked up substantially after the Wall Street crash of September 2008; the current problems in Europe stake a claim on such surpluses as are available with western European members such as France and Germany. Across the Atlantic, America is still deep in a trough despite very low interest rates even as the President struggles with a fiscal deficit.

One would have thought that given the problems in the developed economies, with Japan still struggling to find its feet, capital would have moved to India; the economy is still on song even with lower GDP forecasts of around 7 per cent, and interest rates are attractive for arbitrageurs.

Yet, the Sensex is taking a beating. Perhaps, inflation has something to do with a cautious stance; perhaps, the corruption issue worries investors about government's capacity to manage crises.

But FDI is not faring well either; in the four months to April, $6 billion poured in compared with $7 billion in the corresponding period of the previous year.

This is a far cry from the period before September 2008. Data provided by the Department of Industrial Policy and Promotion in its “Factsheet on Foreign Direct Investment” to April 2011 show interesting features of FDI inflows through the first decade of the new millennium.

After an initial spurt of 52 per cent in 2001-02 (partly a base effect hike), FDI suddenly collapsed for the next two years to recover dramatically from 2004-05, climbing consistently to 2007-08, the high point being 2006-07 when FDI spurted some 146 per cent to $ 22.8 billion from the previous year.

That year coincidentally also marked the high point in GDP growth.

HOW FDI COOKIE CRUMBLES

Cumulatively in the three years to 2011, foreign direct investors have found the services sector the most attractive, with non-financial and financial segments accounting for 21 per cent of the inflows, followed by computer hardware and software (8 per cent) and telecommunications, real estate and construction, 7 per cent each. Power got just 5 per cent while petroleum and related fields a mere 2 per cent.

Maharashtra, unsurprisingly, was the highest recipient with 35 per cent followed by Delhi (20 per cent) while Karnataka and Gujarat had to settle for 6 per cent.

Given the direction of FDI inflows, backward states like Rajasthan and Madhya Pradesh got loose change (half a per cent).

What the DIPP data show us is a profile of FDI preference and, by that token, a picture of skewed growth. But what is more worrying is that FDI appears to shore up existing regional inequalities with the most historically developed region being the most favoured.

From a comparative policy point of view, what the data also indicate is a failure of Indian public policy to steer FDI into sectors that would have created more substantive employment and to regions that need jobs the most.

DIPP data show metallurgy and chemical industries at the bottom of the list. This is a far cry from Chinese policy that did just the opposite to sustain a growth that helped it become the workshop of the world.

Who said only portfolio investors were fair-weather friends?

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