From the analysis in the second chapter we can see that there is a big gap between India and China's inflow of foreign direct investment. Therefore the reasons for the gap will be discussed and highlighted in this chapter. This chapter explains the reasons that why is India lagging behind to attract as much FDI as China do. Suggestions and recommendations will also be given to improve the inflow of FDI in India.
First this chapter discusses the reasons for the gap of inflow of FDI between India and China.
Figure 1.7: CHINA AND INDIA: SELECTED FDI INDICATORS, 1990, 2000-2002
Source: UNCTAD, FDI/TNC database; IMF, World Economic Outlook Database, April 2003.
First: As seen in the above given figure 1.7 we can see that FDI in China rose from US$ 3.48 billion to US$ 52.7 billion from the period of 1990 to 2002. It is due to round tripping the figures look much bigger. If round tripping is avoided then the FDI of China would not have been more than US$ 40 billion at the end of 2002. According to Wie (2005) it has been widely acknowledged that China's FDI inflows are somewhat inflated. Round tripping can take many forms such as under invoicing exports, over invoicing imports, and overseas affiliates of Chinese companies borrowing funds or raising capital in the stock market and reinvesting them in China. If round tripping takes place it can be found in errors and omissions in the balance of payments whose movement is highly correlated with the inflow of FDI. Even after taking into the consideration and adjusting the round tripping still China is far ahead of India in FDI. It can be seen from the above given table that China has managed to attract 3.2% of GDP as FDI compared to India which was just 1.1% of its GDP. According to the world investment report from the period of 1991 to 2001 India ranked 122nd and China at the 54th position.
Second: China's total and per capita GDP are higher which makes it more attractive for market seeking FDI compared to India. In 1978 China (US$ 163.6 billion) was behind India (US$ 168.0 billion) in GDP. Chinese government initiated reforms in 1978 and carried them forward to 1992 due to which it followed an 'export-import' oriented growth pattern as opposed to an Indian 'import-substitution' pattern (Sinha, 2008). After 1979 reform there is a rapid growth in the infrastructure of China which is far much better compared to India. China has high literacy rate and abundant sources of natural endowments due to which it has the high efficiency to attract more FDI (Wie, 2005). Speedy structural changes in China after the liberalization of its economy can be seen in the modern infrastructure of Shanghai. It was a backward small place fifteen years back but now the modern Shanghai attracts 180 million people, has a GDP of $110 billion, has a life expectancy of 80 years and has attained a growth rate of 10% since last ten years. Shanghai receives $60 billion in FDI as opposed to $58 billion for India which shows that being a city its achievements are bigger than India being a country (Sinha, 2008).
Third: FDI inflow can help increasing the merchandise exports of the country. China's merchandise exports grew by 15% during 1989 to 2005. Due to this China's share in the world manufacturing grew from 3.5% to 7.0% as compared to India which stagnated only 1% during the entire decade of 1993 to 2003. Share of foreign affiliates increased from 9% in 1989 to more than 50% in 2005. China attracts almost two third of FDI in its manufacturing sector. Strategic policy initiatives were taken by the Chinese government which provided economic freedom and created openness during the period of 1978 to 2005. Government intervention reduced overtime and in 2005 85% of the manufacturing was outside non state enterprise (Wie, 2005). On the other hand India has not managed to increase its exports and its FDI is concentrated in the information technology (IT) sector. According to the world investment report in the year 1990, FDI accounted to only 3% of India's exports and till today has not managed to increase this ratio above 10%.
Fourth: China has a gigantic domestic market with a system of mass production which reduces the cost of production. This makes China a first choice of multinationals for setting up a wholly owned export oriented unit. India also offers an equally attractive environment but it has yet to evolve a system of bulk production at the scale prevalent to China (Wie, 2005). According to A T Kearney, policies in China are more business oriented and friendly as compared to India (A T Kearney, 2001). China has a better infrastructure and geographical location which makes it a more attractive destination. The labour laws in China are not as stringent as compared to that in India. The tax system in China is not as complex as compared to India. All these advantages facilitate the investors to take decisions rapidly (Wie, 2005). China managed to attract more FDI compared to India despite of restrictions on joint ventures and investment in certain sectors. China achieved this by reinvesting in Hong Kong (China) to avoid restrictions and to obtain rights given to foreign investors. Round-tipping in India is through Mauritius due to certain taxes imposed on income in India. China has since its liberalization has favoured FDI, especially export oriented FDI rather than domestic firms (IMF, 2002).
Fifth: The comparative advantage of China being one of the leaders in the production of electronics equipments especially in the field of IT has led the major companies to choose China as the key centre for production and design. These major companies are Sony, Motorola, Microsoft, Acer, LG, Toshiba, etc (Balasubramanyam and Mahambare, 2003). Sector wise highest inflow of FDI in India is in the service sector then the IT sector and then the real estate sector.
Sixth: China also does better in attracting FDI because of its FDI attitudes, policies and procedures. A Federation of Indian Chambers of Commerce and Industry (FICCI) survey suggests that China has a better FDI policy framework, market growth, consumer purchasing power, rate of return, labour laws and tax regime than India (FICCI 2003). The difference in the FDI performance of both the country is also related to the timing, progress and content of FDI liberalization pursued by them. China opened its door to FDI in 1979 whereas India allowed FDI long before that but did not take comprehensive steps towards liberalization until 1991 (Nagaraj, 2003). Strategic policy initiatives taken by the Chinese government allowed joint ventures between diaspora and local residents, gave incentives, tax holidays, promoted exports and wages were kept low due to allowing free competition. Lease ands ownership rights were provided to the foreigners. Visa norms and zoning laws were simplified for foreigners. Foreign firms could from Wholly Foreign Owned Enterprise (WFOE) in China from 1986 onwards (Sinha 2008).
Seventh: According to Gao (2003) one of the major increase in the inflow of FDI in China is due to the non resident Chinese population in the investing countries who takes an advantage of China being the top investing destination and invest in it. Chinese diaspora which is 50 million people living in Hong Kong, Macau, Singapore, Taiwan (Wie, 2004) was attracted by the government by formulating preferential favourable policies in the Special Economic Zones (SEZ) such as three years tax holidays and reduced rates. The non resident Indians invest in the bank deposits in their country as they are opposed to FDI which leads to low level of FDI in India. Most of the Chinese non residents are business oriented and the opening up of China to trade and investment has provided them the opportunity to extend or shift their business interests in the mother country and take advantage of relatively low cost labour and land. Chinese diaspora essentially is considered more entrepreneurial and wealthy than Indian diaspora (Ramamurti, 2004).There are very few business oriented Indians abroad and most of them are into professional work that lack trade and don't have enough resources to invest in India.
DETERRENTS TO LOW FDI INFLOW IN INDIA
After analysing the reasons for the gap in the inflow of the FDI between India and China this chapter will try to explain the causes for the less inflow of foreign direct investment in India. This will help to find out the reasons for the inadequate performance and the problematic factors faced by the investors in India. Due to this analysis i will be able to give recommendations to increase India's potential to attract more FDI.
Figure 1.8: MOST PROBLEMATIC FACTORS FOR DOING BUSINESS IN INDIA
Source: IMF, India Selected Issues, IMF Country Report No. 05/87 2005.
As given in the figure 1.8 the main problematic factors for doing business in India are Inadequate Infrastructure, Inefficient Bureaucracy, Corruption, Restrictive Labour Regulations, Taxes and Tax Regulations, Political Instability, Poor Work Ethic, Access to Financing and Inadequately educated Workforce. Some of the main factors are discussed below:
Infrastructural Bottlenecks: In a developing country like India an essential requirement for economic growth and sustainable development is the provision of the efficient, reliable, and affordable infrastructure services. According to Sinha (2008) inadequate infrastructure, lack of strategic positioning of the infrastructure, low exports, missing Diaspora involvement and archaic labour laws have prevented development of a conducive business climate. India has a very poor infrastructure and that is the main problem faced by the investors before investing in this country. It is one of the important things for doing business efficiently as it affects number of areas like productivity ability to use comparative advantages, imports, exports, etc. Such factors majorly affect the companies who are dependent on the infrastructure to carry on their business and to exploit the comparative advantages of production in India. Most of the investors have to incur extra cost due to the poor infrastructure in India. It also affects the companies who are export oriented. Poor transportation facilities such as bad roads, delayed railway services are also a major problem of this country. Due to this the export cost increases for the investors even though they have a comparative advantage of cheap production due to cheap man power in India. This affects the company's ability to exploit the comparative advantages to a particular country.
According to Anantaram (2004) the super six states Maharashtra, Andhra Pradesh, Tamil Nadu, Gujarat, Karnataka, and Delhi are getting more FDI. Lack of infrastructure is the biggest hurdle for growth and physical infrastructure of India is state controlled and due to which regional differences in infrastructure concentrated FDI in some specific regions only. The two main problems which are often highlighted in India are poor state of the counties infrastructure as well as the acute labour market rigidities. A trip to urban areas highlights the problem of bad infrastructure in India. The roads described as national highways have very bad conditions. Another major problem in India is power in the rural and even urban areas as it's very common to have blackouts for about eight hours (Rajan, Rongala, Ghosh, 2008). The government of India for the attraction of FDI has upgraded telecommunication, highways and ports but power, railways, water and sewage are still major areas to be considered. The demand for infrastructural services has increased rapidly after industrial liberalisation of the Indian economy. Unfortunately, infrastructural bottlenecks remain the biggest stumbling block of industrial progress in the country (Mathur, 2006). Earlier the government of India use to have a monopoly over the infrastructure sector which leads to slow down in reforming the policies which affected foreign investors. The monopolistic firms discouraged foreign investors due to their selfish interests. The government of India used to think that it would have to be bias on the foreign investors if pressure was exerted by the monopolistic firms in the industry. There used to be a lot of uncertainty in the policies of disinvestment, strategy and implementation in the past which used to further reduce the interest of investors in the country. There has been a reduction of FDI inflows especially in the pharmaceutical and chemical industries due to the absence of patents and trademarks.
Indian FDI Policies: The main problem faced by an investor to invest in any country is the policies of the country in which he has to invest. FDI policies of India are found to be one of the most liberal policies. These restrictions are for the investors who are not citizens of India. These restrictions are related to limits of ownership in certain sectors of the country and the prohibition of investment in certain sectors by foreign investors. There are certain restrictions which are clearly stated in the Indian FDI policy about the restrictions on equity owners and the limits of investment in certain sectors of the economy. There is an automatic entry in most of the manufacturing sectors of the economy of India. There is a limit for the equity ownership in certain sectors for a foreign investor which is given in the FDI policies of India. Foreign investors are allowed 100% automatic entry in the field of infrastructure, courier services, transportation whereas in the field of telecom, airports, civil aviation, oil and gas it has a limit of 49%, 74%, 40% and 51% respectively. The FDI limit for the insurance sector is 26% even though it is under the automatic route.FDI is not permitted in retail trade (except Single Brand product retailing), Lottery, Gambling and automatic energy. Single Brand retailing has a limit of 51%. Foreign investors are allowed 100% automatic entry in sectors like tourism, construction, hotels, communication, advertising, consultancy services, etc. There are some other sectors which are considered sensitive and hence are not opened up. There are few sectors like retail where allowing FDI would help the economy particularly perishable commodities like fruits and vegetables in which annual loss is put at Rs 30,000 to Rs 40,000 crore due to lack of cold storage and pan-India market facility. But there is stiff opposition to opening up retail sector as some fear that it would be a threat to kirana shops which are the small grocery shops owned by the Indian citizens. Nearly 90% of retail trade is by small traders and shopkeepers in the country. But experience of the developed world show that retail chains and small shops can be side by side as in United States and other developed countries (Rajan, Rongala, Ghosh, 2008). There are even some restrictions on the joint venture firms. If a foreign company is in a joint venture with an Indian firm and if the foreign company wants to start operations separately in the same sector, then the foreign company has to obtain a no objection certificate from its Indian joint venture partner. There are also some restrictions on foreign investors on the selling of shares by unlisted companies (Planning Commission of India, 2009).China have attracted a lot of FDI in the real estate sector. The government of India has to relax restrictions if it wants to see an increase in productivity in its construction and real estate sector. This will also help the government not only to attract more FDI as well as creating employment and provide cheap accommodation to the poorer population of the country.
Bureaucratic Controls and Procedures: The domestic policy framework affects all the investments in a country (Mathur, 2006). Government monopolies, laws and regulatory system are one of the hurdles for smooth flow of FDI in India. The procedures required to be followed by foreign investors to start their operations in India is very time consuming. Such time consuming procedures lead to lost of losses to the investors. It is reported that it takes ten permits to start a business in India against six in China, while the median time it takes is 90 days in India against 30 days in China and a typical foreign power project requires 43 clearances at the central government level and another 57 at the state level (Financial Times, 2003). After 1992 India opened up its economy and allowed foreign portfolio investment (FPI) in the domestic stock market due to which most of the investment is done in the FPI rather than FDI. According to RBI foreign investment inflows of January 2010 direct investment amount was US $ 2,042 million and portfolio investment amount was US $ 3,139 million. The procedure for the FPI is easy and time saving as the RBI has granted permission to the foreign investor to invest under the portfolio investment scheme due to which FPI is more than FDI in India. The real estate sector has so far attracted large amounts of FDI in many countries including China but in India the Urban Land Ceilings Acts and Rent Control Acts in States are a serious constraint on the entire real estate sector. These acts need to be repealed if a construction boom is to be initiated which would attract inflow of FDI in India (Mathur, 2006). Most of the post -approval clearances are affected by India's red tape. Again in order to start a power project a company requires 43 Central government clearances and 57 State Government clearances to start business as suggested in a study by the Confederation of Indian Industry (CII). The Foreign Investment Promotional Board (FIPB) takes care of the initial entry stage approval. The problem faced by investors in mainly during second stage of approval like environmental clearance and central and state government approvals. The FIPB approves the investment following the guidelines set by the cabinet and dispatches them in 6-8 weeks. The procedure of registration with the FIPB and the communication details and everything is put up on their website which raises the investor's confidence. Existing as well as prospective investors are given a personalised email facility in their website through which the investors can constantly stay in touch with the advisory board of the FIPB. Most of the surveys conducted by CII have indicated that the approvals made by the FIPB are rated world class. The FIIA (Foreign Investment Implementation Authority) has adopted a new six point strategy in dealing with such approvals. According to the new framework conducted, FIIA conducts regular meetings and interviews with investors, state government, concerned agencies, and administrative agencies to reduce the problems faced by foreign investors (Planning Commission of India, 2009).
Outmoded Labour Laws: In 1979 Flexible Labour Laws were created in China due to which labour housing was freed and free movement of labour in economic zones was permitted. High performing workers were rewarded and a merit based system was introduced (Sinha, 2008). Compared to China the labour laws in India are very stringent. The present labour laws in India discourage the entry of green field FDI because of the fear that it would not be possible to downside if and when there is a downturn in business (Mathur, 2006). According to the Planning Commission of India, India has Special Export Zones which can be considered as a free trade zones but most of the rules and procedures that apply to SEZ's (Special Export Zones) are similar to that of the Domestic Tariff Area. Even though there is an existence of such free trade zones its not in par with the export zones of China in relation to Labour Intensive Production (Planning Commission of India, 2009). The government of India is trying to liberalise these restrictions in order to gain more inflow of FDI. Recently the government has relaxed some restrictions on investment in some sectors of small scale industries. This will help India to attract more FDI and create more employment opportunities for its people
Legal, Tax structure, and Image and Attitude problems: Most of the foreign investors are put off because of the complication in the tax structure of India. Taxes like octroi and entry taxes are levied on export of goods from state to state. This not only proves expensive but also time consuming to the investors. The complexity differentiation between Central and State level approvals and taxes for small scale as well as larger scale industries has proved to be a major cause of reduction of FDI inflows specially in the field of textile industries (McKinsey 2007). One of the other main problems concerning investors at the local level (sub-state) are the policies related to land acquisition, power supplies, building approvals (Planning Commission of India, 2002). Even though India has made constant reforms in its policies to increase the inflow of FDI, its attempts haven't been very successful. Investors still have some doubts before making a decision to invest in India. It is because of bad experiences of some of the investors who invested in the past. This has resulted into a multiplier effect and ultimately deteriorating the business environment in India. One of the major problems with investors is that the "Made in India" label does not appeal to everyone. The main stages that an investor goes through before making a decision to invest in a country are screening, planning, implementing and operating and expanding. According to BCG (2002), India looses in the screening stage. This is because of the time consuming process of decision making in giving approvals. According to a survey conducted by A T Kearney (2001), Indian policies have created positive attitude towards investment decisions to only 3% of the investors while 26% are of the opinion that these policies have made it tough for them to take a decision to invest in India.
5: CONCLUSION
The author has tried to answer the research objectives put forward in the first chapter and is of the opinion that some of the facts of the Indian economy may also apply to the other developing economies.
