India's money going the 'wrong'
way By Paranjoy Guha Thakurta
NEW DELHI - Despite persistent poverty and
income disparities, 2006 marks the point when, 60
years after independence from colonial rule,
Indians were investing more abroad than the
country was receiving as foreign direct investment
(FDI).
With India's foreign-currency
reserves now exceeding US$160 billion and with a
pro-liberalization federal government relaxing
norms for Indian firms acquiring hard currency for
investments abroad, the amount of money invested
by local corporate bodies
outside India is expected to
exceed $8 billion during the current calendar
year. As of April-October, FDI flows touched $6.1
billion, compared with $2.6 billion during the
first eight months of the previous fiscal year.
Also, for the first time since
independence, India's economy has grown by an
average of 8% a year four years in a row, making
it one of the fastest-growing in the world.
However, this growth has not been even nor
has it been inclusive. Whereas manufacturing
industry and the services sector have been
annually expanding at 10% or faster, agriculture
has grown by a niggardly 1.5-2% a year in the
recent past. In addition, economic growth has not
been accompanied by a reduction in inequality or a
reduction in regional imbalances.
"One of
the most positive features of the Indian economy
is that the annual growth rate of gross domestic
product [GDP] has been maintained at 8% because
without growth, the problems of poverty and
inequality can never be tackled effectively," said
Professor Manoj Pant of Jawaharlal Nehru
University.
At least one out of four
people in India lives below the
international-defined poverty line of $1 a day.
Pant said the disturbing part of India's
growth story is that it has widened regional
imbalances. "Much of the northern and the eastern
parts of India have been lagging behind the west
and the south, and this could cause serious social
and political problems," he said.
Other
economic analysts see both positive and negative
aspects to the fact that Indian firms are
investing more outside the country than ever
before. At one level, the competitive abilities of
local entrepreneurs are being recognized
internationally. For instance, the Tata Group
recently put in a bid to acquire the Anglo-Dutch
steel major Corus. And local liquor baron Vijay
Mallya has ambitions of controlling 10% of the
world's alcoholic-beverage business.
"Indian entrepreneurs today have global
strategies to choose optimal manufacturing
locations in order to cut costs and assimilate
technologies," said Subir Gokarn, executive
director and chief economist at Crisil Ltd
(formerly Credit Rating and Information Services
India Ltd). A "negative" aspect is that Indian
companies are going abroad despite the fact that
there is no dearth of investment opportunities
within the country. "The problems here relate to
infrastructural constraints and restrictive labor
laws and job-security regulations," he said.
Ashok Kumar Bhattacharya, managing editor
of The Business Standard newspaper, points out
that "despite the apparently insatiable hunger for
investments in India, the government has failed to
put in place non-discretionary, transparent
mechanisms for channeling these investments".
He said the federal government's opaque
policies are apparent from the absence of clarity
relating to norms for acquiring agricultural land
for setting up industrial units, especially those
in special economic zones (or export-oriented
localities where industrial ventures receive tax
concessions) as well as regulations for inviting
foreign investment in retail concerns.
"Over the coming decade or so, India needs
to invest at least $150 billion on improving its
infrastructure and a similar amount on retail
ventures if the economy is to continue to grow at
8% each year," Bhattacharya said. "We have been
talking about railway freight corridors connecting
metropolitan cities, mega-power plants, six-lane
highways and modern airports, but we have a long
way to go before these projects are properly
implemented."
Gokarn said that "during
2006, a perception has been clearly established
that no major foreign investor can afford not to
be in India". At the same time, he contended,
investment flows from foreign as well as Indian
firms would have gone up considerably if India's
electricity shortages had been addressed and the
overall quality of public services improved. "Not
surprisingly, many Indian companies prefer to buy
into companies outside the country."
Pant
pointed out that 60% of world trade is intra-firm
trade, and one way Indian companies are ensuring
that their exports grow is to acquire firms
abroad. "Through mergers and acquisitions,
exporters ensure access to distribution channels
as well as the latest technologies," he said,
adding that this explains why Indian companies in
industries such as steel, automotive components,
pharmaceuticals and information technology (IT)
are expanding abroad.
Bhattacharya said it
would be erroneous to look at India as having
become a net exporter of capital. "One should keep
in mind that in addition to foreign direct
investment, close to $9 billion is expected to
come into India during 2006 in the form of
portfolio investments in stocks and shares by
foreign institutional investors," he pointed out.
"Moreover, many of the acquisitions made by Indian
companies abroad have been funded or leveraged by
foreign borrowings."
All three economic
analysts quoted here felt that stagnation in
agricultural productivity is a major constraint
for the Indian economy. "I am concerned that not
enough people are moving out of farming and
getting into industry or services," said Gokarn.
Bhattacharya quoted a recent study by the
World Institute of Development Economics Research
of the United Nations University to highlight the
sharp inequality that exists in India. "The top
half of the Indian population own 92% of the
country's wealth while the bottom half own only 8%
- the comparable figures for China are 86% and 14%
respectively. The top 10% of India's population
own 53% of national wealth against 41% in the case
of China," he pointed out.
On the positive
side, Gokarn said that despite three years of high
world prices of crude oil, inflation has been kept
more or less under control, with the wholesale
price index peaking at 5.5%. This, according to
him, is a significant achievement, since India
imports three-fourths of its requirement of crude
oil.
Pant said the success of India's IT
industry is now internationally recognized. He
referred to a report by the United Nations
Conference on Trade and Development that had
estimated that India's share in world trade in IT
products and services had grown impressively from
almost nothing in 1995 to about 16% in 2004.
