The World Investment Report for 2008, released last week by the United Nations Conference for Trade and Development (Unctad), presents a rather mixed picture about India’s prospects as a significant destination for foreign direct investment (FDI) in the coming years. On the one hand, there is no question that the quantum of inflows has increased significantly over the past few years, reaching $22.95 billion in 2007, up 16 per cent from the previous year. Unctad expects this momentum to persist, despite the current turbulence in global financial markets, as a reflection of the overall optimism about India’s long-term growth prospects. In fact, the report predicts that global flows of FDI will decline by a significant 13 per cent in 2008 because of the turbulence, but does not expect countries like India and China to see too much attrition. A second factor working in favour of India is the strong positive perceptions that investors seem to have developed about the investment climate. It ranks as the 2nd most preferred destination in the world, behind only China, suggesting that the attractions of a booming market and the availability of low-cost resources to some extent outweigh the burdens of poor infrastructure and weak governance. In fact, the report refers to the results of a survey conducted by the Japan Bank for International Co-operation, which indicates that Japanese manufacturers actually prefer India over China as an investment location.
However, before complacency takes over, attention should be paid to some of the negative points in the report. Even after the recent spurt in investment, India ranks only 106th in the world when one takes FDI as a percentage of GDP. Even accounting for the large size of the economy and its sectoral mix, which is skewed towards agriculture and services, both of which are of relatively low capital-intensity, this hardly suggests a buoyant and attractive investment environment. Indeed, what it suggests is that India has benefited from a rising tide of world investment flows over the past few years, a period during which Indian companies have also made significant investments overseas, adding up to over $25 billion in 2006 and 2007. Significantly, given the aspiration of the UPA government to attract huge amounts of FDI into infrastructure, the report suggests that the actual flows in recent years have been way short of requirements and makes the point that investment in these sectors will probably depend far more heavily on public resources over the next few years. At a time when both fiscal constraints and the limited capabilities of government agencies are visible, this assessment should set alarm bells ringing. Lots of money being invested very quickly in infrastructure is the cornerstone of the economy’s ability to sustain growth. Without it, India’s status as a global investment destination for other business activities will dwindle.
While it can do little to influence the course of the global crisis, the government can and must respond to the negative messages in the report. While there is visible progress in opening up infrastructure sectors for private investment, the process is way too slow and uncertain, given what the economy needs. What was promised when the Committee on Infrastructure was set up in 2004 has simply not been delivered.
6 months ago