Search the Internet          Tips  Sites: Finance, Investment

'India can attract $100 bn FDI in 5 years'

Arvind Padmanabhan in New Delhi

India has the potential to attract $100 billion in foreign direct investment over the next five years by focussing on three basic areas that draw high inflows of capital globally, a leading international consultancy has said.

"Countries that are achieving high levels of FDI are typically focusing on three areas: domestic industry, export-oriented sectors and privatisation," McKinsey and Company said in a report released Friday.

"None of these layers have, however, been exploited in India," said the report, commissioned by the American Chamber of Commerce in India and presented to External Affairs Minister Jaswant Singh.

If existing barriers to investment are removed India can not only attract $20 billion FDI annually but also add one million more jobs and see its gross domestic product grow by an additional 2 per cent.

To ensure the removal of investment barriers, the study suggested the setting up of an apex advisory committee under the Commerce and Industry minister, apart from making sector-specific recommendations.

It also recommended a panel comprising representatives of foreign companies and their Indian joint venture partners to give a feedback to the government. Individual ministries should be given FDI targets that should be monitored by the prime minister twice a year.

According to the study, which undertook comparative analyses of FDI in Brazil, China, Malaysia and Poland, four sectors alone had the potential to account for a half of the projected FDI inflows. They were energy, telecommunications, financial services and food processing.

The study said while China attracted $43 billion FDI in 1998, followed by Brazil, Poland and Malaysia with $19.3 billion, 4.9 billion and 4.6 billion, respectively, India barely managed $2.6 billion.

In China's case, the study said, the quantum jump on overseas capital inflows came from focusing on domestic industry and exports, while Brazil reaped a rich harvest of its successful privatization program.

The McKinsey study said that in the area of domestic industry, the oft-repeated barriers such as inflexible labor laws, poor infrastructure and lack of incentives were not the principal causes for low FDI inflows.

The lack of clarity in sector-specific policies is the main culprit, the study said, adding that by removing restrictions in auto industry, the government was able to attract FDI of $1.5 billion between 1991 and 1999.

In the case of export-oriented FDI, the study said while China was able to attract $16 billion in this area between 1996 and 1998, India barely managed $1 billion and, that too, in a period of eight years till 1999.

"Here the story is different from domestic industry - adequate infrastructure and flexible labor laws are important enablers, in addition to the elimination of red tape."

In the third broad area of privatisation, the study took the Brazilian example and said that while the South American nation managed to attract FDI worth $30 billion over the last 10 years from this area, India's divestments program has barely managed $56 billion.

For this, McKinsey blamed multiple constituencies, including political opposition within and outside the ruling coalition, red tape and labour fears.

The study also made recommendations on the four sectors that have been identified as having high FDI potential after interacting with as many as 33 foreign investors, three Indian corporates, officials of six ministries and four McKinsey country exports.

In energy, where officials of several US-based multinationals such as Enron, CMS Energy, Unocal, Exxon-Mobil and Caltex were interviewed, the study looked specifically at three areas - power generation, crude oil exploration and liquefied petroleum gas.

The barriers ranged from lack of transparency, inadequate homework and uncompetitive playing field between state-owned firms and foreign players.

In food processing, the biggest disincentives were identified as high sales tax and excise duties, while in the case of telecommunications, the main barrier to FDI was stated to be the unstable and inconsistent regulatory environment.

In the fourth area of financial services, the study found that foreign banks face a tough licensing regime and high statutory requirements.

Indo-Asian News Service

Money

Business News

Tell us what you think of this report