FDI Blues

Why has India received in the last nine years of economic liberalisation only a fraction of the foreign investment that China gets in a single year? It certainly is not for want of trying, with union ministers, state chief ministers, assorted bureaucrats and industry delegations regularly touring the world’s capitals of commerce soliciting investment. Progressively, India’s policy on allowing the entry of foreign investment too has been liberalised, with the present regime being more rule-based and less amenable to discretion than ever before. If foreign investment is still chary of coming to India, we have to look beyond pretty policies on paper to institutional weaknesses.

In 1991 approvals of foreign direct investment (FDI) proposals by the government were to the tune of $2.2 billion. Actual inflows were 65.8 per cent of that amount. The momentum of both approvals and inflows went up in the subsequent years, with approvals reaching a peak of $15.3 billion in 1997. Actual inflow for that year was 29.9 per cent, a post-1991 high till then. However, since 1998, when BJP-led coalitions took over the reins of the government, the ratio of inflows to approvals has gone up. The ratio went up from an average of 23.5 per cent for the previous six years to 43.3 per cent in 1998 and further to 59.5 per cent in 1999. For the first quarter of 2000, the ratio has risen to 93.1 per cent. The government would like to pass this off as a sign of better performance. In reality, the rise in the ratio of inflows to approvals is entirely a consequence of a sudden drop in approvals beginning 1998.