A recent report published by the Economist Intelligence Unit, forecasting foreign investment flows to various countries for the rest of the decade, brings a dose of realism to the debate on India's growth prospects. Basking in the glory of 8 per cent plus growth, what may have been forgotten is that it takes substantial investment each year to sustain that growth. Investment takes place when the overall climate is conducive; optimistic growth prospects are an important component, of course, but a host of other factors also significantly influences investment decisions. Global surveys of foreign investors have repeatedly emphasised the deterrent role of bureaucracy, corruption, poor infrastructure and labour market rigidities. That the significance of these factors has not reduced in recent years is reinforced by this report. In a business-as-usual scenario, the report says, India should resign itself to moving from an inflow of about $6.7 billion in 2005 to $14 billion in 2010. The usual contrast is made with China, which will receive $86.5 billion worth of investment this year, but the annual flow is expected to fall somewhat to $80 billion by 2010. | |
| The report underlines the fact that mere liberalisation""heightening or removal of sector caps and so on""is not a guarantee of increased flows. India has had virtually no restrictions on inflow into manufacturing activities, but barring a few prominent sectors such as automobiles, it has clearly not experienced a deluge of inflow. When all is said and done, operating conditions are the critical determinant of flows and this is where India does badly and China does well. In fact, as the country's foreign exchange position has improved, perhaps even to the point of excess, restrictions on outward foreign investment have been steadily eased and, these days, there is more news coverage of Indian firms making investments abroad than of foreigners investing in India. Clearly, if domestic investors find it hard to justify expanding capacity in India and prefer to serve both domestic and global markets from facilities located in more hospitable environments, one can hardly expect foreigners to feel any differently. |
| |
| India has so far escaped the penalties associated with relatively low investment rates because of the growth momentum generated by the services sector, which, on the whole, is less capital-intensive than manufacturing. Of course, this reflects a bias in the investment environment towards services, intended or unintended. However, it also raises concerns about sustaining such high rates of growth on the back of a bounded set of activities. One issue that the report raises about China, in the context of a decline in annual investment flows, is that there is growing uneasiness about the economy's excessive dependence on this source of funds. Similar concerns can be voiced about India's "investment-less" growth. Sooner or later, services will hit a plateau and manufacturing will have to assume a larger role in sustaining the growth momentum. It will be unable to do so if current investment trends continue. The lesson that policy-makers must draw from studies like this is that, for the most part, it is pointless differentiating between foreign and domestic investors. With the easing of restrictions on capital outflows, their behaviour patterns are converging. When it comes to investment policy, what is sauce for the foreign goose is also sauce for the domestic gander. |
| |
|
| |
