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FDI: Heeding the China model

G. Srinivasan

THE Union Commerce and Industry Minister, Mr Murasoli Maran, deftly combined industry and trade in his portfolio since his return to the Union Cabinet under the National Democratic Alliance (NDA) in 1999 from his earlier stint in the United Front Governm ent in 1997. In his first stint he held only the industry portfolio and now he is charged with the commerce and industry portfolios. But his zeal in roping in foreign direct inflows (FDI) of $10 billion first made in 1997 remains undimmed, though the act ual inflow was never half this set target. It is not fair to charge him with any willful lapse for not realising the target set barely four years ago as he himself was out of power for 18 months in the interregnum.

Be that as it may, in his address to the annual Economic Editors Conference held in the capital recently, Mr Maran was euphoric enough to state that as a result of the progressive steps taken by the Government, FDI inflows into India was growing consiste ntly. The inflows had risen from ``a mere $144 million in 1991 to $4.5 billion in 2000''. The FDI inflows this year have been encouraging despite the global slowdown. The inflows in January-August 2001 totalled $3.19 billion -- 33 per cent higher than th at received in the corresponding previous period.

No doubt, as part of the overall strategy to boost industrial production, the investment limit for foreign institutional

investors has been augmented to the level of FDI ceilings in all sectors. Mr Maran also said that a six-point strategy had been devised to ensure that the targeted FDI flows were achieved. The six-point strategy comprises: (i) Secretariat for Industrial Assistance (SIA) functioning as the Secretariat for Foreign Investment Implementation Authority (FIIA) to contact all foreign

investors to ascertain the progress of the implementation; (ii) such contacts initially be confined to the operational level to be upgraded to board levels; (iii) taking up the problems with the appropriate Ministry/Agency or State governments; (iv) cont inuous and vigorous interaction by the FIIA with the Central and State ministries; (v) involving Indian missions abroad for follow-up action, and (vi) a sector-wise approach by the SIA in pursuing FDI cases for more efficacious coordination with administ rative ministries.

While all these steps can help to a limited extent, the fact remains, as the Minister conceded, that the inflow-to-approval ratio on a cumulative basis since 1991 is 37 per cent. The reasons for this relatively small ratio are not far to seek. Steps to i mprove productivity and growth in the industrial sector are doubtless required which should encompass reform of bankruptcy legislation, reform of policies governing the small-scale sector, privatisation of government enterprises and liberalisation of lab our laws to improve competitiveness. It is not that Mr Maran is unaware of the importance of the unfinished agenda of the original reform measures initiated in 1991. But he cannot go on wishing away the urgent need to put these measures in place under th e oft- repeated alibi that India does not believe in `big-bang' reforms but is content with a gradualist approach.

Resorting to gradualist approach to reforms should not mean that the essential ingredients for a productivity spurt in the economy can come at a snail's pace in these days of digital economy. When Mr Maran cited the latest World Investment Report of the UN

Conference on Trade and Development (UNCTAD) which unequivocally contends that ``simply opening up an economy is no longer enough,'' he was apt up to this point. But UNCTAD's next point that there is a need to develop attractive configurations of locatio nal advantages is a point where Indian authorities are unable to make even a modest start. It is easier for the Centre to plead helplessness by passing the buck on to State governments, but creating attractive configurations of locational advantages coul d be done only in concert with the States. The sooner this is attempted, the better for the economy in terms of evoking due investor response and bridging the growing gap between inflow and approval.

It may not be off the track to recall the obsessive interest Mr Maran has over China's success story ever since he returned from a visit there in February 2000. Speaking at a recent CII seminar on `Exporting to China', Mr Maran made no bones about his op en admiration for China's success story. ``Like Deng Xiaoping, I want all of our countrymen to say that `to get rich is glorious'. Whether people are labeled `Rightist' or `Leftist', they are good `cats' if they catch the mice of increased competitivenes s and boost the economic reforms process,'' so said Mr Maran. Who is to contribute to increased competitiveness and boost the economic reforms process, apart from the actual players, is anybody's guess as the policy-makers and enabling environment provid ers in the form of governance count a lot.

It is easier for Mr Maran, as he did at the Economic Editors' Conference, to state that the onus is on the States and today there are no backward ones but only that are badly-managed. Even to ensure that the badly-managed States compete with the rest req uires direction from the Centre if they fail to improve their lot due to identified structural problems and inadequate fund flows. It would be in the fitness of things if the Commerce and Industry Minister is able to convince his Cabinet colleagues about the need to ensure locational advantages for foreign investors in India so that the requisite FDI flow is ensured, with market forces determining the best choice for investment-destinations, unhampered by any meddlesome role currently being played by th e Central and State bureaucracies.

Even as India has been groping in the dark to realise higher FDI flows at a time when China has been successful in attracting more than $40 billion in 1999 and 2000, the Paris-based Organisation for Economic Cooperation and Development (OECD) and Chinese authorities hosted a conference in Xian on October 11-12 on the role of FDI in China's regional development. The policy messages from this conference included: (i) Enhance the attractiveness of China's central and western regions, in particular by inves ting selectively in infrastructure where competitive advantages could be realistically established, as has been done in the coastal provinces where special economic zones are operating; (ii) develop an integrated approach that addresses broader policy ar eas affecting regional development -- competition, taxation, financial markets, environment, labour market, trade and capacity building -- and combine actions in economic, social and environmental sectors and between different bodies at local, regional, national and international level; (iii) develop a set of policy criteria by which to judge the investment environment and FDI attraction performance in each region; (iv) emphasise the presence of a reliable and transparent legal and regulatory milieu, si mplify the structure of provincial taxation (there are now 27 taxes at the sole discretion of Chinese regions) and national/regional legislation; and (v) promote stronger linkages of FDI with the local economy by encouraging investments that build on loc al resources and initiatives.

In sum, the Chinese authorities are not content with accounting for the lion's share of global FDI flows into their country. Instead, they seem to be overly concerned by the neglected regions and seek to bring them into the mainstream by coopting interna tional institutions such as the OECD to devise steps in this direction. As the UNCTAD Investment Report rightly said, just like competitive firms differentiate themselves from their rivals by fostering clearly identifiable products with recognisable bran d names, some countries too could, over time, identify and develop their distinct ``investment products''. Mr Maran also stressed this aspect when he cited the case of how Bangalore has become a brand name for the development of software with its pool of highly skilled engineers and competitive software companies.

If India is desirous of attracting foreign investors, it is time it bestirred itself by unveiling a set of practical propositions and policies in this direction, besides getting its act together on the implementation of the unfinished reform agenda so th at its credentials as a serious bidder for attracting foreign investment and setting its economy on a higher growth are beyond doubt.