Does Foreign Investment Really Fosters India's Growth?:Critical View.
Narendra Modi came to power by promising fast economic growth to create millions of jobs. So, it is mysterious that he has spent much time on foreign visits and receiving foreign dignitaries like Xi Jinping. Foreign relations matter, but can not create millions of jobs- that requires structural reforms that dynamise Indian investment. Till now, industrial data does not reveal any investment boom.
It is claimed that Xi would pledge $100 billion of Chinese investment in India. Actually only $20 billion of deals were signed. The rest was apparently hype.Besides, only tiny proportion translate into actual investment. "The Economic Freedom Of the States of India", an annual report of the Friedrich Naumann Institute shows that of industrial MoU signed by entrepreneurs in 2010-11, conversion into investment ranged from a low of 3% in Bihar to 18.4 % in Haryana.
Xi signed MoU investing in two industrial parks in Gujarat and Maharashtra at a total cost of Rs. 40,000 Cr. This sound exorbitant. Even at 1 Cr per acre, the land cost will be just 2,500 Cr. Top class infrastructure is already available or coming via Golden Quadrilateral and Dedicated Rail Freight Corridor. The China may offer cheap finance, but the huge debt nevertheless has to be serviced by India, so a careful look at costs and relevance is essential.
Over 600 SEZ have been approved since 2006, but barely 170 have come up, and these are mostly tiny software SEZs. Many promoters of SEZs have abandoned their projects for want of demand from industrialists, despite tax breaks. Companies setting up units in SEZs have to export more than import, but can sell mainly in the domestic market. Mukesh Ambanis's SEZ in Maha Mumbai lies mostly unfilled and his proposed SEZs in Maha Mumbai and Haryana have been abondoned.
Even so, politicians want to create even more industrial parks and corridors. Please, the problem is the lack of a climate that sparks the investment boom, not of parks. Big parks and corridors yield big kickbacks, which is why the Congress was fond of them. Modi is supposed to be different.
He went tot Japan and returned with pledge of $35 B in public and private Japanese investment. A Japanese official explained that this was conditional on a good investment climate in India that made such projects viable. Modi will told the same thing when he go to US.
Big foreign investment makes big headlines. Yet India itself has a saving rate of 30% of GDP. It is contributed mainly by households and unincorporated business. FDI in India is barely 1-2% of GDP. This links to global market and technology, and so is disproportionately useful. But it is not the crucial driver of the growth. That has to be local investment. Above all, It has to be investment by small and medium enterprises, which already contribute more to investment and growth than large corporations.
The share of private corporate sector in GDP is less than 18% while that of non-corporate sector is 45%. Yet the corporate sector including foreign companies gets all the glamour and VIP treatment. It gets easy access to credit and equity finance while small and medium enterprises are starved. Economic liberation benefited large businesses most. hence Modi should focus on energising Indian investment and give favorable climate to medium and small enterprises.
