The Hindu Business Line : Investment Commission — Gameplan to attract foreign funds

To help realise the Tenth Plan growth target of 8 per cent and to make the country attractive for investors, there is the need to constitute the Investment Commission. The panel will recommend to the government pro-active policies that would create the right environment to attract FDI. Also, it would strive to reduce the gap between proposals and projects under implementation and quicken the pace of investments, says Bhanoji Rao.

FOR the Tenth Plan period (2002-07), the Planning Commission had set a target average annual growth of 8.1 per cent for the economy. This average is to be obtained by achieving a growth rate of 6.7 per cent in 2002-03, moving up gradually to reach 9.3 per cent in the final year of the Plan, 2006-07. The expectation was that, from then on, the country would be firmly on a high growth path and the Eleventh Plan could hope for an average growth rate of 9 per cent.

The Commission, on its Web site, had recently put out a paper, Approach to the Mid-term Appraisal of the Tenth Plan (2002-07), which expresses its scepticism on the possibility of the realisation of the Tenth Plan growth target. What does it take to achieve an 8 per cent rate of economic growth if not the `shining' 10 per cent? There is no magic way. It can happen only by stepping up investment. There must be an investment rate (gross capital formation upon GDP) of at least 30 per cent, since a lot of investment is needed for long- gestation infrastructure projects as well.

Given that the growth rate must also be supported by an acceleration of consumer demand, it is safe to assume that the domestic saving rate would remain at the present rate of around 24 per cent of GDP for a few years to come. Thus, there must be foreign funds, in the form of foreign direct investment, to the tune of 6 per cent of GDP, for investment in physical assets.

To translate the foreign investment requirement of 6 per cent of GDP into a dollar figure is not difficult. Take the latest Economic Survey estimate of GDP at Rs 25,16,900 crore. Then, apply the average exchange rate of Rs 45.95 per dollar to obtain the GDP in dollar terms, which amounts to $550 billion. At 6 per cent of this total, around $33 billion is the FDI requirement to obtain the 8 per cent growth rate. Since this number is generated from the estimated GDP for 2003-04, it is safe to say that the $33 billion requirement may be taken as a sort of lower limit.

Against the requirement of $33 billion, a look at the ground reality. Despite the substantial overall capital inflow (that is, the positive balance on capital account of BoP) of around $10-12 billion in recent years, FDI was averaging around $5 billion in the past four years (2000-04). The actual inflow, thus, is way off the $33 billion requirement.

In the context of the vast gap between the requirement and the need, there is the need to constitute the Investment Commission. It signals a change from permissions and approvals to actively seeking investments. The Commission, to be located in the Finance Ministry, will be set up within two months, that is, before the end of the year. Despite its location in the Ministry, the Commission will have full autonomy and government support and all the policy decisions emerging from the recommendations of the Commission will go directly to the Cabinet Committee on Economic Affairs (CCEA) for approval.

The Commission will give recommendations to the government on both procedures and policies to attract FDI. It would endeavour to secure a certain level of investment every year and review progress at the end of every quarter. It will seek meetings and visit industrial groups and houses in India and large companies abroad in sectors where there was dire need for investment. It will also help reduce the gap between proposals and projects under implementation and quicken the pace of investments.

The main purpose of the Commission is to make the country attractive for investors, considering the growing competition for investment globally. The issue simply is how to make the country the "best investment destination". Some years ago, a graduate student reviewed the findings of over 30 research studies published in journals in the 1980s and early 1990s. All the studies had the aim of discovering the factors that would help attract FDI and those that would inhibit. They are all based on a quantitative evaluation of the FDI experience of a large number of developing and industrial countries. Without going into technical details, a look at the results.

There are some host country factors that exert a strong influence on FDI such as market size, market growth, tariff barriers, market proximity, political stability and quality control. The factor "political stability" should be interpreted more as policy stability in otherwise large and growing markets. Where domestic markets are not large, FDI flow is influenced positively by the presence of large markets close by. India in the post-reform period has the combination of market size, growth and policy stability. Of the other two factors strongly linked to FDI inflow, protection (via tariff barriers) is no longer important in the post-WTO era. As regards quality, however, there is the catch. If Indian products become synonymous with top quality, then, the chances of getting massive inflow of investment are bright.

Delivering top quality would require best infrastructure, excellent testing and standards, highly qualified and disciplined human resource, and so on. The proposed Investment Commission should have a strong focus on the quality dimension.

More recently, two young researchers at GITAM Institute of Foreign Trade, Visakhapatnam, explored the determinants of FDI inflows. They considered 51 countries and the average annual inflow in 1989-94 and 1995-99 in 51 and 64 countries respectively. The level of per capita GDP and the growth rate of GDP were found to be significant determinants of FDI. Thus, market size and growth are once again confirmed as the main attraction to the foreign investors.

Market size and growth are also behind the ranking of preferred FDI destinations. A. T. Kearney's latest FDI Confidence Index, based on a survey of executives from the largest companies, puts India in the third position in terms of top spots for investment. China takes the first place followed by the US. \Despite the good news of India obtaining the third rank on FDI confidence, it is important not to lose sight of the fact that China gets FDI of around $50 billion against India's $5 billion. Even assuming that half the FDI into China is from Hong Kong and, hence, it does not strictly qualify to be classified as FDI, it is still true that the inflow into China is several times that into India.

The challenge before the Investment Commission is clear. It has to help ensure that the FDI inflow increases by some $25-30 billion annually. The first order of business for the Commission, when duly constituted, is to work out a gameplan for the ambitious target.

(The author, formerly with the World Bank and the National University of Singapore, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam. He can be contacted at bhanoji@vsnl.net)

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Investment Commission — Gameplan to attract foreign funds