India's FDI is Booming, but the Economy Needs More

India has pulled ahead of The far east and United States as the most favoured destination for foreign immediate investment (FDI). According to the Financial Times (FT), India received US$31 million in FDI in 2015, which is US$3 and US$4 billion more than China and also the United States respectively. Moving through fifth place in 2014 to very first certainly reiterates that India is really a bright spot in the world economy today.

But is being number one sufficiently good to make the Modi government’s ‘Make in India’ productivity reform a success tale and achieve its desired 8–8.5 percent growth?

The FT’s position recognises India’s efforts to enhance investment through a number of change measures. India is a good market to invest in as other rising economies — including China — tend to be rapidly slowing. This is also evident from the 2015 World Economic Forum’s report that has placed Indian at 55 among the world’s most competitive economies — 16 positions higher than China.

There are discrepancies in the FDI inflows data used by the actual FT and by the Book Bank of India (RBI). The Foot puts FDI inflows (estimated capital costs) to India at US$31 million in first half of 2015, while the RBI’s figure of net FDI inflows for the same period is actually US$19 billion. This is because the Foot measures actual and announced transactions, while the RBI only measures the former.

The data show that FDI inflows to India have increased during a period of global declines in FDI. FDI outflows from Indian have drastically decreased from US$9 billion in first half of 2014 to US$1.6 billion for the similar period in 2015. This suggests which domestic and foreign traders recognise the efforts of the government to improve the investment atmosphere to sustain growth.

It could be incorrect to celebrate Indian overtaking China in FDI inflows. There’s also discrepancies in the FT’s Chinese FDI figures. China’s National Record Bureau put FDI inflows to The far east at US$68 billion, compared to the FT’utes US$28 billion. More importantly, China includes a larger stock of FDI accessible. In 2013, China’s per capita FDI stock was US$691, when compared with India’s US$181. China has had much more FDI for longer than India, which has contributed to technology development, exports, competitiveness as well as growth.

In addition, even if India celebrates being the top place to go for FDI, it needs to back up the celebrations with actions on the ground. India still ranks 142 out of the 189 nations in the World Bank’s ‘ease of conducting business indicators’.

India needs to develop infrastructure additional. Although the transport minister is extremely proactive in making new roads, India has a long way to visit when it comes to energy, telecommunication along with other modes of transportation. Numerous Indian power companies are troubled because of their bad balance linens and bankrupt state electricity boards. The government is not capable of meet the required infrastructure investment. India must develop a much better regulatory mechanism and a rational pricing system. It needs to change financial markets and strengthen challenge resolution mechanisms so that the personal sector can find infrastructure projects economically feasible.

India must also deal with land acquisition, which is crucial to ‘Make in India’. This is a politically difficult move. The states govern property acquisition rather than the central government. Although the federal government is pressing for higher growth, which may force states to promote land acquisition, narrow pro-poor and pro-farmer national politics hold back states government. The infrastructure for a unified marketplace needs to be designed and performed at the top, not by states in bits and pieces.

India needs to improve governance and streamline the process of registering and clearing new initiatives. It must reduce — or at least rationalise — the number of clearances for setting up company; develop a coordination mechanism between central and state level departments; and promote e-governance extensively for transparency and efficiency. If India manages to do this, it’ll go a long way.

It’s high time the central government works seriously with the states on policy coordination for investment and FDI. Even though it is politically contentious, it is time to review the rigid and old labour rules. The Indian native labour force is accommodative to investment, but current guidelines still scare investors — particularly foreign investors.

The Union federal government has taken some steps like the ‘unified labour and industrial portal’ and the ‘labour inspection scheme’. The state of Rajasthan has also gone for comprehensive reforms, but the Indian economy, as a whole needs to move on this problem. India must invite continual inflows to help Indian firms ascend the technology ladder. This will be possible if India improves intellectual property rights to incentivise, and give safety to, innovation. Foreign traders are currently scared to share their technology or establish joint ventures in India because of the lack of intellectual property rights.

If the actual Indian government is seriously interested in capitalising on its new position as most favoured destination for FDI, it’ll need many more changes on the ground. It might be true that India is number one for FDI, but this won’t be enough.

Why FDI is not enough for Modi’s ‘Make in India’ strategy is republished with permission from East Asia Forum