Growth in most emerging economies has been synonymous to investments by foreigners. The trend is only set to linger. Developed economies have little scope to grow investor wealth domestically. Economies like China have had investments in the form of FDI as the hallmark of their growth. But India seems to be going on a different route altogether.
As per the UN, India's emerging peers in Asia absorbed more than half of global FDI for the first time in 2010. The amount stood at a sterling US$ 1.1 trillion. Countries like China, Singapore and Malaysia have been the key recipients of this long term capital in Asia. Even then south Asia has seen 14% drop in overseas investments in the year gone by. This can be attributed to the 32% drop in the FDI into India. Long term investments into India stopped at US$ 25 bn in 2010 as against US$ 36 bn in the previous year.
Issues ranging from land acquisition to environmental clearances have dogged the inflow of funds into the Indian economy. Neither of these seems to have any quick fix solution. But India will have to lure long term money if its investment plans into infrastructure is to materialize. The slow pace of policy reform to open up sectors such as retail, insurance to foreign investment also acted as a deterrent. The government may have to take steps in this direction in the forthcoming Budget.
Corruption related issues in sectors like telecom, financials and real estate have had investors rethink their investment policy for India. An assurance of faith in the long term prospects of these lucrative sectors is in order.
The country's current account deficit so far has been taking solace from the steady inflow of FII money. But a flight to safety of the short term money could ruin the country's trade balances.
A continuing fall in FDI inflows will keep the country's dues to foreign countries going higher. This could even put pressure on the rupee dollar exchange rate. If commodity and oil prices rise globally, a weaker rupee will add to inflationary pressures. This is a risk that the government and the RBI can hardly afford.
Unlike China, India need not rely only on heavy duty investments to achieve her growth targets. Nevertheless the necessity of foreign money in the medium term cannot be denied. Indian policymakers clearly need to do more to attract such investments. Indian companies in the meanwhile need to make themselves more competitive to foreign peers.
India currently features as a dark spot in the FDI influx into Asia. It is in the best interest of Indian and not just foreign investors to make the economy more long term money friendly.