FDI : THE LEAP OF THE DRAGON

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While Indians pride themselves on attracting around five billion dollars as foreign direct investment every year, it is important –and lamentable- to note that India stands nowhere in the race when compared with China. On an average, China has attracted a whopping sum of sixty billion dollars as FDI on an annual basis in recent years. Although India has opened up the FDI cap in most of its sectors, it is far from achieving the kind of growth in capital inflows that China has witnessed. The elephant has miles to go before it can be at par with the dragon.

One of the primary causes why the Chinese economy has tasted sweet success in recent year, is solely due to the surplus amount of capital available to it in the form of FDI. This capital has been constructively utilized by the government in the growth of the country. Although both India and China have been trying to woo foreign investors, China has attracted $500 billion as FDI since the liberalization of its economy, whereas India has attracted only $50 billion.

Admittedly, China definitely has an edge over India since it started with its policy of liberalization ten years before India did. However, there are some stark differences between the blue-print of the policy in both the countries. China has focused only on opening up its export-oriented sectors for foreign investors. Industries like toy-making and textiles have specially been patronized by the Chinese Government to groom them into investment hotspots. India, on the other hand, has opened up many of its industries to foreign investors without any specific game-plan.

In the 1990s, China concentrated its efforts on becoming a manufacturing giant. Special Economic Zones came up in the country with the specific aim of manufacturing goods for export. These SEZ’s turned out to be goldmines for foreign investors, since they could enjoy tax holidays and liberal labor laws. Further, the Chinese Government encouraged the inflow of foreign capital in SEZs by means of fiscal incentives like low duties and single window clearance. India has so far fared miserably in following China’s example. Although the SEZ Bill was passed by the Indian Parliament in 2005, several SEZs in the country are facing major bottlenecks in the form of red-tapism and massive public opposition. Elaborate registration and clearance procedures act as a deterrent for setting up new SEZs in the country. As a result, India loses out on FDI.

Another handicap for India in attracting FDI is the lack of participation by the Indian diasporas. According to an estimate, seventy per cent of the FDI inflow in China is on account of its expatriates. China has made a conscious attempt to build its image as a haven for investors with high returns on investment. This has helped to rope in non-resident Chinese investors. Non-resident Indians, on the other hand, have been relatively inert to India’s growth story and have refrained from investing in its relatively risk-prone economy.

India has much to learn from China’s growth story. It needs to shift its focus from inviting investment for domestic markets to export-oriented sectors. Infrastructure development to support our industries has to speed up. There is a fundamental need to remove various roadblocks for foreign investment and to create an investor-friendly climate. Unless these measures are undertaken, the elephant shall continue to lag behind the dragon.

Namrata Singh

[Image source:http://flickr.com/photos/worldeconomicforum/2894020855/sizes/m/]

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