Paranjoy Guha Thakurta
Despite persistent poverty and income disparities the fading year marks the point when, 60 years after independence from colonial rule, Indians are investing more abroad than the country is receiving as foreign direct investment (FDI).
With India’s foreign currency reserves now exceeding 160 billion US dollars and with a pro-liberalisation federal government relaxing norms for Indian firms acquiring hard currency for investments abroad, the quantum of money that is expected to be invested by local corporate bodies outside India is expected to exceed 8 billion dollars during the current calendar year.
Also, for the first time in its independent history, the Indian economy has grown by an average of 8 percent a year four years in a row, making it one of the fastest 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 percent or faster, agriculture has grown by a niggardly 1.5-2 percent 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 percent because without growth, the problems of poverty and inequality can never be tackled effectively,” Prof. Manoj Pant of Jawaharlal Nehru University told IPS in an interview.
At least one out of four people in India live below the international-defined poverty line of one U.S. dollar a day.
He added that 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 recognised 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 percent of the world’s alcohol business.
“Indian entrepreneurs today have global strategies to choose optimal manufacturing locations in order to cut costs and assimilate technologies,” says Subir Gokarn, executive director and chief economist, Crisil Limited (formerly Credit Rating and Information Services India Limited). 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 labour laws and job security regulations,” he told IPS.
Ashok Kumar Bhattacharya, managing editor, ”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”.
In an interview with IPS, he said the federal government’s opaque policies were apparent from the absence of clarity relating to norms for acquiring agricultural land for setting up industrial units, especially those located 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 dollars for improving its infrastructure and a similar amount on retail ventures if the economy is to continue to grow at 8 percent each year,” Bhattacharya argues. ”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 says 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 contends, investment flows from foreign as well as Indian firms would have gone up considerably if India’s electricity shortages came down, if power utilities worked more efficiently and if the overall quality of public services improved. ”Not surprisingly, many Indian companies prefer to buy into companies outside the country,” he says.
Pant points out that 60 percent 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 points out, adding that this explains why Indian companies in industries such as steel, automotive components, pharmaceuticals and information technology (IT) are expanding abroad.
Bhattacharya adds that it would be erroneous to look at India having become a net exporter of capital. “One should keep in mind that in addition to foreign direct investment, close to 9 billion dollars are expected to come into India during 2006 in the form of portfolio investments in stocks and shares by foreign institutional investors,” he points out. “Moreover, many of the acquisitions made by Indian companies abroad have been funded or leveraged by foreign borrowings.”
All the three economic analysts quoted unanimously felt that stagnation in agricultural productivity was acting as 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,” says Gokarn.
Bhattacharya quotes 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 percent of the country’s wealth while the bottom half own only 8 per cent -- the comparable figures for China are 86 percent and 14 percent respectively. The top 10 percent of India’s population own 53 percent of national wealth against 41 percent in the case of China,” he points out. On the positive side, Gokarn says 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 percent. This, according to him, is a significant achievement since India imports three-fourths of its requirement of crude oil.
Pant adds that the success of India’s IT industry is now been internationally recognised. He refers 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 around 16 percent in 2004. This trend is growing by leaps and bounds and Indian IT companies are now investing in the West as well as in countries like China and Japan.
