The United Nations conference on trade and development has recently published the World Investment Report for 2003. This suggests that global foreign direct investment flows in 2003 will be more or less at 2002 levels and should begin to revive in 2004. According to the WIR, India’s FDI inflows were $ 3.4 billion in 2001 and 2002. In recent years, the WIR has brought out a potential index and a separate performance index for economies, and the gap between the two provides a benchmark on how an economy is doing. Understandably, in a large country like India, FDI inflows will never be that significant, whether expressed as percentage of the gross domestic product or share of total investments. Out of 140 countries ranked in potential on the basis of 1999-2001 data, India’s rank was 84th; its rank in performance was 120th.
It is tempting to argue that the reforms decade of the Nineties changed this. But the WIR’s figures suggest that such complacency is unwarranted. Compared to potential, India was an under-performer in 1988-90 and 1993-95, and continues to be an under-performer in 1999-2000. There is a valid point about classifying and accounting FDI. Since India does not follow the norms of the International Monetary Fund on FDI measurement, FDI inflows are under-estimated by at least $ 1 billion a year. Definitions will soon be harmonized. Consequently, FDI flows into India will move up from something like $ 4 billion in 2003 to around $ 6 billion. This is, of course, considerably distant from the $ 10 billion annual inflow target. In A.T. Kearney’s recent FDI confidence index, India moved up from 15th in September 2002 to 6th. September 2002 was an exception, because barring that month, India has always ranked between 5th and 7th. Service-sector investors now think India is the 4th most attractive destination, up from 14th in September 2002. Clearly, there is a gap between the perceptions of chief executive officers and chief financial officers, and actual FDI inflows.
Deterrents to FDI inflows have not changed and red tape and procedures continue to figure at the top. These are often at the state-level and that explains large variations in conversion ratios (share of inflows to approvals) across states. However, there are also constraints at the Centre. The FDI policy in manufacturing may be completely open, but we continue to have a dysfunctional system of no objection certificates from existing Indian joint-venture partners. More important, there are sectoral equity caps in services. Not only do services account for a large chunk of cross-border FDI flows, but Kearney’s survey also highlights services. Following recommendations of the N.K. Singh committee, which are rotting somewhere, these equity caps need revising upwards, if not to be thrown open. Nor is the paranoia about restrictions for agriculture or retail trade justified. Prospective foreign investors also complain about inadequate infrastructure. This does not change overnight and beyond air travel and telecommunications, there are now positive movements in roads and ports. This needs to be complemented by changes in Central policy.