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Creating an ambience for foreign investment
Prashant Saran
Opening up of Indian economy for foreign investment in 1991 has caused a quantum jump in the level of foreign investment in India. From almost no investment, we have reached a level where foreign direct investment of about US $4 billion a year is taking place. This change occurred because the government relinquished their control and command philosophy and started welcoming the foreign investment instead of positively driving away the investors. Yet for a country of a billion people, foreign investment of US $4 billion a year translates into investment of US$ 4 per head. No one seriously expects this level of investment to make a dent in the raging poverty and unemployment in the country. Perhaps an investment of US $50 billion a year may allow us to break the vicious circle of poverty, low savings and low investment. This figure is about 15 per cent of current GDP and with a little deft handling, we may hope that the economy will able to absorb the inflows.If the investments grow at 15-20 per cent a year,it will take decades to achieve this level of investment. For a quantum jump in the level of investment, we have to effect a paradigm shift. It is somehow felt that once the governments stop interfering in the running of businesses, the foreign investors will happily come in droves. There is no quarrelling with the fact that most of the ante-diluvian controls must be done away with. Yet, it is important that removal of controls is a necessary condition for foreign investment, not sufficient one. The host country must offer attractive ambience for doing business. It is here that the importance of infrastructure comes in. It is of course necessary to create modern ports, roads and telecommunication facilities. It is also necessary to have adequate capacity for generation of power. This can be done by augmenting the installed capacities and more importantly by optimal utilisation of existing capacities. Our business and government leaders appear to be sufficiently aware of the importance of creation of
infrastructure and are taking steps towards it. Still the abolition of controls and creation of good infrastructure is not likely to give us any edge over other developing countries who are way ahead of us in both the fields. What we need is a definite competitive advantage. One way to gain this advantage is by creating an excellent soft infrastructure. When foreign investors go to a new country they do factor into their costs and time frames, the inadequacy of infrastructure and slowness of bureaucracy. However, the inadequacy of soft infrastructure such as availability of good consultants, reliable databases and competent lawyers is often more insidious. During last few years many foreign companies entered into Indian business scene in sectors as diverse as automobiles, footware, whitegoods and designer wear. With an exception or two, almost all of these firms faced a lack of demand for their high-end goods. It is possible that the market research firms they employed supplied them with not very accurate
data on the size of Indian middle class and their incomes. Perhaps, they did not factor intangibles such as cultural preferences and lack of brand awareness. The initial difficulties of these multinational companies may be bad for the individual companies, it is worse for inflow of further investment. Only very daring will venture into a field strewn with the dead and the wounded. As a new entrant in the Indian businesses arena, a company would like to have reliable data on the demographic patterns, income patterns. availability of raw materials and trained workforce before taking decision about location of their factories, price range and product mix. As on date, most of the investors depend on hear-say or intuitive knowledge of their managers. Most of the consulting firms who perform due diligence do it on qualitative inputs. It is a daunting task for the foreign investors to start projects in unchartered territories with no authentic data to backup their decisions. On the other hand, if the same company
decides to invest in Europe or North Amercia, such reliable data is available from a number of vendors. It will take some time before the individual Indian consultants and firms in this line of business attain the requisite size and standards. Secondly, such firms will not have easy access to the data generated by the government agencies. A firm, partly owned by the RBI or the FIs could be opened which can have a technical tie-up with some reputed data management company overseas. Alternatively, organisations like CII and Assocham can pool up their resources to start such a service. Such a firm may require support from the government and trade associations because it may take a long time to break even.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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