India as an FDI destination: In fact and in rhetoric

India as an FDI destination: In fact and in rhetoric
India as an FDI destination: In fact and in rhetoric

I recently spent three weeks in India as a part of the State Department's US Speaker Program. My topics were foreign direct investment and strategic aspects of US-India economic engagement. I spoke with all kinds of audiences, ranging from 17 members of Parliament and two ministers in New Delhi to think tanks and state officials in Hyderabad and Bengaluru to schools of management in Kolkata and to banks and lawyers in Mumbai.Everywhere I went, there was appreciation for the vast investment needs of India and the role FDI might fill in meeting those needs. After all, the World Bank estimated that India needs $1.7 trillion for infrastructure alone for the decade ending in 2020. When investment needs for housing, schools, offices, factories, and other public structures are added in, the figure is much higher. Such vast amounts of capital are simply not available from within India. Even adding in what may be available from existing and planned multilateral banks, it becomes obvious that there is a huge gap between need and resources. Filling this gap will require considerable FDI.Under Prime Minister Modi, progress is being made toward obtaining the needed FDI. According to UNCTAD, last year's FDI into India was up 22 per cent over the previous year to reach almost $35 billion. This year is even better with the Indian Department of Industrial Policy and Promotion calculating that for the first quarter of the Indian fiscal year 2015- 2016, FDI is up 31 per cent over the same period for the previous fiscal year.And yet the Indian FDI accomplishments thus far are pale by comparison either to the need indicated above or to the FDI accomplishments of China's $232 billion for 2014 (including Hong Kong) or the total of $337 billion 2014 FDI from the United States (by far the world's leading source of outbound FDI).In order to meet its needs for FDI, India should send a powerful signal to international capital markets that the old days of business difficulties and the failed “fast track” power projects in the 1990s and early 2000s are over in fact as well as in rhetoric. Perhaps the least controversial way to do this is to meet Prime Minister Modi's challenge to improve India's ranking in the World Bank's “ease of doing business” survey from 142 to within the top 50 by 2017.The problems in US-India trade and investment are many and well known. From a US perspective, they include continued limitations on stock ownership and complicated regulatory restrictions, retroactivity and uncertainty in tax decisions, lack of infrastructure, labor law restrictions, local content requirements particularly in regard to solar power, preferential market access for government purchased information technology equipment, inadequate intellectual property protection, a virtually closed agricultural market, and high and uncertain tariff rates.From an Indian perspective, some of the issues that are hindering growth in India's trade and investment with the United States are temporary visas (particularly H1B, L1 visas), social security totalisation, and oil and gas export restrictions.However, no single goal of the Modi administration pulls together factors that bear directly on trade and investment with India as does the ease of doing business. The World Bank's ease of doing business rankings are a composite of ten different factors. These factors fall into two basic categories: (1) “the complexity and cost of regulatory processes”; and (2) “strength of legal institutions.” These categories may be characterised as related to a single overarching category: “the operation of law and regulation.”The primacy of legal and regulatory reform as the key to improvement of its prospects for increased FDI is illustrated by the factor in which India receives its lowest mark from the World Bank. That factor is “enforcing contracts.” In this factor, India receives a dismal rating of 186 out of 189. This ranking is based on the procedures, time and cost to resolve a commercial dispute. However, this factor leads directly to the sanctity of contract weakness in the Indian economic system. It extends particularly to FDI where state governments have a bad international reputation for changing contracts.India also scores badly at 184 out of 189 in dealing with construction permits. As modeled by the World Bank, this is also a rule of law issue since it includes the procedures, time, and cost to complete all formalities to build a warehouse. If the legal procedures are not right of course time and cost go up. The other factor which is important in this context is corruption.The World Bank specifically disclaims any attempt at gauging the prevalence of bribery and corruption. However, many perceive corruption to be a major factor in the construction sector, a sector which should be a major recipient of FDI. Transparency International in its international perceptions of corruption index puts India 85th out of 175 countries and territories surveyed.The good news is that because India already has a functioning court system, improvement in this single factor can be so great as to markedly improve India's ease of doing business score. India does a remarkably good job of protecting minority investors (7th out of 189) and getting credit with movable collateral laws and credit information systems (30th out of 189). So rapid improvement is certainly feasible.The days when India had to worry about Western economic imperialism are gone. India is strong and assertive. It has mature and fully functional institutions perfectly capable of defending its interests. The present challenge for India, for officials and average citizens alike, is to improve its environment for doing business and cast aside a reflexive opposition to things foreign. In a previous era, there may have been justification for regarding as necessary, resistance to foreign proposals, requests, or assessments, simply as a way of proving Indian independence. This is no longer the case, and the reasons for attracting FDI are manifest.

Raymond E. Vickery Jr is a Global Fellow at the Woodrow Wilson International Center for Scholars and Former Assistant Secretary of Commerce, Trade Development in the Clinton Administration. He is the author of 'The Eagle and the Elephant: Strategic Aspects of US-India Economic Engagement', 'India Energy: The Struggle for Power' and numerous articles on US-India relations.

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