India still lags behind China

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Old 06-Oct-2015
Post India still lags behind China

MUCH enthusiasm has been generated by two recent reports that seem to show that India is becoming a more attractive destination for foreign investors while also becoming a more competitive location for doing business. The reports are a survey by The Financial Times of foreign direct investment flows from January to June this year and the Global Competitive Index compiled by the World Economic Forum (WEF).
The news emanating from these surveys is hopeful as it indicates that FDI flows to India are picking up and that it is slowly becoming more competitive in the world. It cannot, however, be seen more than just one small step towards making India a more vibrant economy in the eyes of international investors. It does not imply that India has suddenly become a more competitive or robust economy than China, which is what many headlines have been implying. The reports and rankings need to be viewed in the larger context of the slowing world economy as well as the problems facing China which has virtually been the engine of global growth in recent times.
As far as the FDI survey is concerned, it must be noted that a major factor for China’s rapid growth has been the huge infusion of global investments over the past few decades. Such foreign investment inflows have powered it to its sustained high growth of 9 to 10 per cent over a long period.
India, in contrast, has lagged far behind China in its efforts to attract foreign investors, even though economic reforms were launched way back in 1991. After a decade of such reforms, foreign investment flows to India had reached only $6 billion as against $46.9 billion to China in 2001. By 2014, FDI inflows into China had touched $128 billion compared to $34.5 billion for India. (The figures are based on UNCTAD data). Thus the gap between India and China, as far as FDI inflows are concerned, has been enormous, right up to the last calendar year.
It would therefore be an overstatement to say that India has overtaken China on the FDI front. The fact is that India has attracted more foreign investment than either the US or China only over the six-month period from January to June this year. The data compiled by The Financial Times of the UK shows that India attracted $31 billion of FDI over this period, $3 billion higher than China and $4 billion higher than the US. The fact is also that this data covers a period where the Chinese economy has been slowing down gradually for various reasons.
One of these is the gradual shift from being an export-led economy to relying on domestic consumption for pushing up demand. Growth rates which averaged about 10 per cent for decades are now down to 7 per cent. Even this means that China is moving much faster than most of the world. In other words, if China was growing at its normal pace, India could not have lured more foreign capital than this economic behemoth.
The rest of the world has also been slowing down, with Europe facing the Greece crisis as well as the immigrant inflows from Syria. The US is just back into recovery mode after the recession but growth is still minuscule. In this context, the higher FDI inflows are comforting but show that India is basically looking a more attractive destination only because many other countries are looking less alluring because of serious economic strains being faced by them.
As for the second report by the WEF, it shows India has jumped 16 places to get the 55th ranking in the global competitiveness index out of 140 countries. This is not as high as the 43rd position that it had reached in 2007 under the UPA government. Even so, the credit for this leap is largely due to the perception that the present government is pro-business, pro-growth and is trying to weed out corruption which is considered the biggest obstacle for foreign investors coming to this country. Significantly, one must note that China retains its 28th position in the survey, despite the slowdown and several recent crises faced by it.
The improvement in the index is being attributed to the launch of schemes like Make in India and Skill India programme to improve vocational skills. It also has much to do with the perception that the Modi government will carry out further reforms soon to boost growth. Interestingly enough, the WEF has described the lack of Internet penetration in the country as one of its weakest features. It notes that only one out of five Indians can access the Internet and less than two of five have access to a cellphone. This makes it one of the least digitally connected countries. This data is telling at a time when Digital India is being promoted with vigour and a globe-trotting Prime Minister is visiting Silicon Valley to lure investments from the Internet giants like Google and Facebook. There is clearly a long way to go before India can become as digitally connected as most of the world, despite its manpower strengths in the area of information technology.
In this context, one must thus point out that there are many reports and many rankings. For instance, India is ranked a low 120 in the list of digitally connected countries. It has also dropped two places in the World Bank’s Ease of Doing Business to 142.
It would therefore be wise to view all such reports and rankings with some degree of caution. These are all based on differing parameters, and doubts are even being raised now on the accuracy of the data used by some of them such as the FT survey. Besides, for sustained rise in FDI as well as improvement in competitiveness, much will depend on whether policies and procedures on the ground match the hype of the grand presentations being made both at home and abroad. Red tape and corruption continue to plague investors. Big changes still need to be made in these two areas. So maybe we should postpone the celebrations for a little while longer.

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