We must go with the flow
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We must go with the flow

China has benefited from foreign investment. There's no reason why India can't. BZ Khasru reports.

india Updated: Oct 11, 2012 23:21 IST
BZ Khasru
BZ Khasru

India and FDI seem to be an odd couple. They don't go well together, at least in some parts of this vast nation. Empirical evidence suggests that FDI can fuel an economic boom. And a lack of it would only guarantee a Hindu growth rate. Foreign investment does not necessarily mean sounding the death knell for India's mom-and-pop shops. Rather, it will offer opportunities to build thriving enterprises.

To make up for lost opportunities, India's economy must keep humming like a bullet train. There's enough evidence that capital inflows power a nation's growth engine.

With a $3 billion American aid in 1953, war-ravaged Germany rebuilt its shattered economy and became a bulwark against Communism. South Korea received $636 per person per year for three decades and secured its seat at the table of the rich.

A more recent example is China, which took in as much as $45 billion a year in foreign capital in the 1990s. Its openness to FDI helped it grow more than 9% a year on average, boosting its per capita income fourfold between 1978 and 2000. By contrast, India's income doubled, according to International Monetary Fund (IMF) estimates.

When China opened up in 1978, its FDI was a big zero. By the 1990s, its share was second only to America's. China, however, was not better placed than India in attracting foreign capital. Both were closed economies, plagued by low income levels and heavily dependent on agriculture.

India and China share many attributes that affect capital inflows, such as labour force, market size and overseas diaspora. If China can lure investors, there is no reason why India cannot.

The fear of big retailers gobbling up mom-and-pop shops - a rallying point for the FDI opponents - is more of a myth than a reality. Giant retailers, such as Wal-Mart and Tesco, control barely 20% of the total market share in China two decades after the country opened up the sector to FDI.

India's chronic opposition to FDI has caused concern among US investors, with one of them recently describing the world's largest democracy as a 'less than attractive' place to bet on.

"The soon-to-be most populous country in the world should be a long-term source of opportunity for efficient companies and retailers, but India's policies are making it difficult for investors, new businesses and, worse, its own citizens," commented David Harris, chief investment officer of Rockefeller & Co, the American investment firm that manages more than $7 billion.

Recent FDI data based on UN statistics bear out this investor pessimism: India's FDI inflows peaked at $42.6 billion in 2008 and plunged to $24.6 billion in 2010.

Under Prime Minister Manmohan Singh's plan, states are free to implement or shun FDI. But those that reject it will sign a pact with economic stagnation. West Bengal, for example, dimmed its prospect to be the shining jewel in India's economic crown because of its misguided policies. The state slipped from rank four in 2007 to rank 13 in 2008 in industrial investment plans.

Politicians like Mamata Banerjee and Nitin Gadkari, who profess that they are dedicated to the cause of the have-nots, will harm the nation by pursuing their anti-FDI agenda. What they don't realise is that capital inflows help everyone, the rich as well as the poor.

BZ Khasru is editor of the New York-based The Capital Express

The views expressed by the author are personal

First Published: Oct 11, 2012 23:09 IST