Vivek Kaul
The finance minister P Chidambaram is currently in the United States trying to solicit foreign direct investment(FDI) into India. This is one of the things that the government is trying to do in order to control the depreciation of the Indian rupee against the dollar.
Foreign investors wanting to start new industries and businesses in India bring in dollars through the FDI route. To do business in India the foreign investors need to exchange their dollars for Indian rupees. Hence they need to sell dollars and buy rupees. When this happens, there is a surfeit of dollars in the foreign exchange market, and this ensures that rupee gains value against the dollar.
At least, this is how it is supposed to work in theory. A big reason behind soliciting investment through the FDI route is that money brought in through this route cannot disappear overnight.
The question is will this work? Just inviting foreign investors to set up shop in India is not enough. The sales pitch needs to be followed up with a lot of serious background work. As Deepak Parekh, Chairman of HDFC, India’s biggest home finance company recently said “Look at our Foreign Direct Investment (FDI) policy. Ministers go all out to woo investors, but when investment proposals come, we cannot take decisions…Our policy on FDI is akin to inviting guests over to our house, but when they arrive, we refuse to open the door.”
The commerce minister Anand Sharma is also doing the rounds of foreign investors in the United States, along with Chidambaram. He cited some of the things that the Indian government had been doing to address complaints of foreign investors. One of the things that he talked about was the setting up of the Cabinet Committee on Investments (CCI) headed by the Prime Minister Manmohan Singh. The CCI was notified at the beginning of this year, on January 2, 2013, to ensure faster clearances for the implementation of major infrastructure projects.
But nothing of that sort seems to have happened. As The Economist points out in a recent article “a new committee headed by the prime minister, Manmohan Singh, has tried to push forward projects tangled in red tape…But the committee has not made a meaningful difference. On The Economist’s count, the fresh capital investment it has sanctioned (rather than discussed or delegated to other bodies) amounts to 0.4% of GDP, spread over several years.” The bottomline is that the ministers at least need to get their sales pitch right.
Foreign investors will not jump to set up shop in India just because a few ministers from India come calling. Any foreign investor will look at the ease of doing business along with the prospective returns that he can make, once he has got the business up and running.
Every year the World Bank puts out a ranking which measures the Ease of Doing Business across countries. In the 2013 ranking, India came in 132nd on the list. India’s ranking was the same in 2012 as well. When it comes to starting a business India is 173rd on the list. What this means is that foreign investors have an option of starting their business in a much easier way in 172 countries other than India.
When it comes to enforcement of contracts India is 184th on the list. The broader point is that why will the investors come to India when they have better options available elsewhere? Also it is worth remembering that the Western world in general and the United States in particular is currently dealing with the aftermath of the financial crisis. There is great pressure on companies to set up new businesses or expand current ones in their home countries. In this scenario if they do decide to go abroad and set up new businesses, it needs to be a very good proposition for them.
Foreign investors can get money to set up businesses and industries in India, but some basic infrastructure like power, roads etc, needs to be provided to them. And that is missing in India. As Jean Drèze and Amartya Sen, who are seen as the intellectual gurus of the current Congress led UPA government, write in their new book An Uncertain Glory – India and Its Contradictions “There has been a sluggish response to the urgency of remedying India’s astonishingly underdeveloped social infrastructure and of building a functioning of accountability and collaboration for public services. To this can be added the neglect of physical infrastructure (power, water, roads, rails), which required both governmental and private initiatives. Large areas of what economists call ‘public goods’ have continued to be neglected.”
This is something that needs to be set right if the government wants foreign investors to set shop in India.
What also does not help Chidambram and Sharma’s sales pitch is the fact that Indian businessmen do not seem too keen to expand their businesses or set up new businesses in India. The investment by Indian businesses has fallen from 17% of GDP in 2008 to 13% in 2012.
As Ruchir Sharma points out in Breakout Nations “At a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 %, they are looking abroad. Overseas operations of Indian companies now account for more than 10% of overall corporate profitability, compared with 2% just five years ago. Given the potential of the Indian domestic market, Indian companies should not need to chase growth abroad.”
How will Messrs Chidambaram and Sharma ever be able to explain this dichotomy to the foreign investors?
Foreign investors are no fools and they have realised over the years that it is not easy to do business in India. The spate of scams from 2G to coalgate has also contributed to them staying away. FDI into India has fallen in the last three out of the four years. For 2012-2013(i.e. The period between April 1, 2012 and March 31,2013), FDI fell by 21% to $36.9 billion, as per government data. The United Nations Conference on Trade and Development (UNCTAD) in a recent release said that FDI inflows to India declined by 29 per cent to $26 billion in 2012.
In order to attract foreign investors to invest in India and set up new businesses, a lot needs to be set right. And that needs to be done in India. Ministers visiting the United States on junkets is no way to solve the issue.
The article originally appeared on www.firstpost.com on July 12, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)