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The Rediff Business Special/Neena Haridas

The rise and fall of FDI: Dropping fund inflows alarm India

India's public relations machinery has seldom been busier than in the last four months. A brace of objectives took precedence over all else.

The missions of gaining edge in the global political arena and attracting foreign funds have held the government enraptured.

Yet, foreign direct investment, or FDI, keeps dwindling alarmingly. So what does India do to refurbish its image and make itself a destination for serious investments?

Thus the promotional activity that the mandarins of external affairs and finance ministries are gung-ho about. India turned on the charm when the US President Bill Clinton came calling last month. It is now wooing Britain with UK's Foreign Secretary Robin Cook visiting India.

France offered a platform to attract more investment. President K R Narayanan's current visit to that nation is another step towards strengthening trade ties.

The story does not end there. More trade alliances are in the offing. Delegations from Poland and South Asian Association for Regional Co-operation, or SAARC, nations are here to talk business, too.

India seems to be in a hurry. There's a reason for it. When the National Democratic Alliance, or NDA, government took office, the targeted foreign direct investment, or FDI, for was $10 billion. But that figure was unrealistic, if one considers the current level of FDI inflows.

Despite the finance minister's all-out effort to woo deep-pocketed Western investors, the FDI inflow remained sluggish.

FDI inflows actually dropped from $ 3.557 billion in 1997-98 to $ 2.462 billion in 1998-99. The declining trend continued in 1999-2000, with FDI in the first eight months of 1999-2000 lower at $ 1.330 billion compared to $ 1.61 billion during the corresponding period the previous year.

According to figures released by the commerce ministry, major foreign investment has been coming in only two sectors: power and telecom, in that order.

Of the total approved FDI of Rs 2018.36 billion, the power sector accounted for 66.7 per cent, while telecom got about 17.8 per cent.

The ministry figures reveal that the engineering sector continued to remain at the top of the list among the FDI recipients during the last three years, though the magnitude of inflows declined over this period.

The second in importance was the chemicals sector, with FDI to this sector increasing by 46 per cent in 1998-99 compared to the previous year. Investment in the services sector, too, increased from $ 321.3 million in 1997-98 to $ 368.5 million in 1998-99.

Electronics and electrical equipment, which received maximum inflow in 1997-98 was, however, relegated to the fourth position in 1998-99 due to a significant reduction in inflows.

Significantly, the infotech and biotech sectors did not attract as much investment as was expected.

Fund flows have been woefully slack. And if the survey conducted by global management consultants, A T Kearney, is anything to go by, FDI inflows to India are not seen gathering pace in the near future either.

A T Kearney's annual FDI Confidence Survey reveals that India has fallen out of the list of the top ten investment destination preferences of the world's top 1,000 corporations.

Barely six months ago, India was pegged at a decent sixth slot. However, in the January rankings it has slipped to a miserable eleventh position, according to the Kearney survey.

Surprisingly, the slide has come despite the fact that the actual score has increased from 1.07 to 1.14. The survey involves 1,000 international companies, which account for 70 per cent of total global FDI flow and generate over $ 16 trillion in annual sales.

"It seems that the Vajpayee government is really struggling to attract FDI to stimulate the economy. Corporate chiefs are not convinced that the new government is capable of implementing fast and effective reforms," says Simon Bell, principal, A T Kearney.

"The very fact that the FDI confidence has fallen shows that the money that would have otherwise come to India will now go elsewhere," he says.

The Associated Chambers of Commerce and Industry, or ASSOCHAM, has nothing to say that could lift the gloom. According to it, FDI inflow that slid 40 per cent in the last eight months, is likely to plummet further.

ASSOCHAM notes that the FDI inflows are too meagre for sustenance when taken in the context of India's size. As of now, India has attracted less than 1 per cent of its gross domestic product, or GDP, in terms of FDI ever since the reforms process was set in motion.

According to the survey, the most attractive investment destinations are the US, the UK and China, in that order.

For the NDA government, this is a big blow, considering that it has been burning midnight oil to showcase India as an alluring investment destination.

The finance minister allowed 74 per cent foreign equity in domestic satellite projects and the pharmaceutical sector through the automatic approval route. Not to be left behind, the commerce minister initiated the process for framing clearer criteria for foreign investment in each sector.

These measures were supposed to put the economy in top gear. So what went wrong?

"The reason for this downslide is the failure to improve the macro-economic and organisational framework. The government has also failed to speed up business facilitation and bring about policy coherence," says Shekhar Bajaj, ASSOCHAM president.

"We haven't even achieved 10 per cent of our targeted $10 billion. Besides, we have not been able to impress countries the world over. We attract FDI from a select few. Most of the capital-rich nations prefer to stay away from the Indian market," he adds.

"In the early 1980s, India had more FDI coming in than any other Asian nation, be it China, Korea, the Philippines or Thailand. But today, China's FDI is at least 20 times that of India's," he says.

Mauritius remains the largest source of FDI, followed by the USA. However, of late, there has been a substantial decline in inflows from these two sources as well.

Inflows from Mauritius were $ 900 million in 1997-98, which declined to $590 million in 1998-99. Inflows from US also slipped from $ 687 million in 1997-98 to $453 million in 1998-99.

Japan and Italy were, respectively, the third and fourth largest sources of FDI in 1998-99. Fortunately, both these countries increased their investments in 1997-98 and in 1998-99.

Inflows from Germany, the fifth largest source of FDI, were less in 1998-99 compared to the previous year. There was major dip in inflows from South Korea and the Netherlands as well in 1998-99. Germany, South Korea and the Netherlands accounted for a decline of $ 391.3 million in 1998-99.

Even non-resident Indians, or NRIs, do not seem to be enthused over investing at 'home'. Despite the sops offered by the government, they seem to be looking the other way when it comes to investing in India.

As against an inflow of $ 42 million last year, FDI inflows this year from the Indian Diaspora are down 69 per cent at $ 13 million. Compare this with the 1996 figure, which stood at an impressive $715 million!

"Foreign investors are frustrated by the slow pace of infrastructure sector reforms in India," says Yves Thibault de Silguy, senior advisor, Suez Lyonnaise des Eaux, or SLDE, a Franco-Belgian industrial group which provides private infrastructure services in over 120 countries.

"SLDE has a global turnover of 200 billion francs, but in India it is only 180 million francs. We are keen on developing a relationship with India in areas of electricity, water, gas, airport management, etc. But the problem is that the reforms have to come quicker. It is up to the government to instill confidence among the investors," he adds.

Some investors who are keen on investing in India feel that the reason for the lukewarm response to Finance Minister Yashwant Sinha's call is the "contradictory pull and pressures of India's politics."

"We had set up a colour manufacturing joint venture in Karnataka, but pulled out of it midway. The villagers, with encouragement from the opposition party, raked up environmental issues and we could do nothing. Even the government failed to give us an alternative, says a Singapore-based company's chief executive officer.

"The problem of political instability is of prime concern to investors. Even if it is the same government coming to power for another term, it is like a wholly new government for us. Documents take time to get processed," says the managing director of a Scandinavian firm.

"Besides, in a coalition government there always are pressures from all the supporting parties. These things really make us tread cautiously in India," he adds.

Tarun Das, director-general, Confederation of Indian Industry, or CII, has a strategy to pull India out of this quagmire. "Our financial sector lacks a strong fundamental structure. This discourages FDI. Despite high potential in this area, very little happens," he says.

"Of the total FDI worth Rs 1,956 billion approved from 1991 to 1999, only 30.9 per cent has been implemented. The plethora of post-approval clearances adds to the cost of the projects. Now, if a nation like, say, South Korea provides single window clearance, why should an investor waste his time and money in India?" he says.

"We have to come up with single point clearances, privatise rapidly, and liberalise labour laws to get the financial sector in order," he says.

The picture seems a bit dismal, but the A T Kearney survey offers a slight ray of hope. According to the survey, 70 per cent of the respondents said they were interested in India because of its vast market potential.

If the obstacles of poor infrastructure, transparency and political instability are removed, it will not take to convert intent into action, the survey adds. Put bluntly, if the government is ready pull up its act, the investors are ready to put in their money.

Most of this 'money' is likely to come from the Japanese. The AT Kearney study says that of the lot, the Japanese seem to the be the most bullish about India as they have upgraded India to the fifth position from the 12th last year.

Interestingly, despite Clinton's visit, the Americans have downgraded their preference for investment in India from the 6th to the 15th slot.

"In a global market where everybody is out to woo investors, it is not just enough to improve. Bold and proactive moves are needed to bring about radical change. The fact that economic growth has slid from 7 per cent to 5 per cent in the last three years show that reforms have not done as much they should have," says A T Kearney's Bell.

Bell, however, believes that FDI will come to India by virtue of its long-term potential. "It is not that investors are not keen on India. It's just that they are wary of the delays here. Yet, as of now, the most attractive sectors in India are telecom, insurance and retail," he says.

UNI adds:

FDI inflows rose 26 pc to Rs 168 billion in 1999: govt report

The Annual Report of the Ministry of Commerce and Industry (Department of Industrial Policy and Promotion and the Department of Industrial Development) for the year 1999-2000 was released in New Delhi today.

The report says that during 1999 (January-December), FDI inflow (including Global Depository Receipts) has been of the order of nearly Rs 168.67 billion as against Rs 133.39 billion during 1998 (January-November), a rise of 26 per cent.

The cumulative approval of FDI since 1991 adds up to over $ 69.70 billion (including GDRs) and the total inflows upto December 1999 are nearly $ 19.2 billion, giving a success rate of over 33 per cent.

Industrial production has recorded a significant increase in 1999-2000. The General Index of Industrial Output rose 6.2 per cent growth during April-December 1999. It rose 3.7 per cent during the corresponding period the previous year.

The manufacturing sector recorded a growth of 6.7 per cent and the electricity sector, a growth of 7.7 per cent.

The growth rate of 11.9 per cent in the consumer durables sector in April-December 1999 was about three times the growth achieved during the corresponding period of the last year.

The growth rate of capital goods sector at 6.6 per cent was in keeping with the requirements of growth attained in other sectors.

The present trend in industrial production is expected to be maintained because of improved performance of the infrastructure sector, macro-economic policy support, stability of the government and better trade prospects unleashed by reduced barriers to trade, the report says.

Industrial policy review by the government has been a continuous process in order to remove procedural hassles faced by the industrial community. The idea is to promote an industrial climate conducive to investment by domestic and foreign capitalists. The thrust of the new industrial policy has been to make Indian industry globally competitive.

The report says that in the year under review, time-frame for consideration for FDI proposals has been reduced from six weeks to 30 days. General permission has been given to foreign owned Indian holding companies for downstream investment. The Foreign Investment Implementation Authority has been set up to provide a single point interface between foreign investors and the government.

At present, FDI is not permitted in sectors such as agriculture (including plantations), housing and real estate, domestic trading, print media, defence and strategic industries.

A new Industrial Policy has been formulated and is being implemented for the north-eastern region to accelerate industrial development of the region.

The Patent Information System has been modernised under an United Nations Development Programme-assisted project with modern equipment such as computers and online access to external and internal datebases.

In the context of globalisation of trade and industry, the government has set up the Quality Council of India to raise quality consciousness and to improve the competitiveness of Indian industry.

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