BY PRAKASH JOSHI
India has received a basket full of kudos and is being promised more if it agrees to deepen and widen “cooperationö with the Paris-based Organisation for Economic Cooperation and Development (OECD), also known as the “rich man's clubö.
A new report, titled ‘OECD Investment Policy Reviews: India 2009’, says that India has become a major global player with high economic growth rates and its performance in the past year has been particularly impressive in view of the global collapse in FDI (foreign direct investment) flows.
The Review launched by OECD Secretary General Angel Gurría on Dec. 4 in New Delhi, states that India is today both a major destination for FDI, and a major source of FDI. "This is a vote of confidence in India," particularly in view of the fact that FDI flows on the whole have contracted significantly.
The first OECD Investment Policy Review of India shows the country's "great progress in building a successful policy environment to encourage investment and the resulting acceleration in FDI inflows and economic growth".
In fact, with economies reviving from the global meltdown, India is targeting annual FDI worth 50 billion US dollars by 2012. It would double the inflows by 2017.
In the period between 1991 and March 2009, FDI worth 158 billion US dollars has come in to India. Even during 2008-09, when the global financial crisis squeezed availability of capital, FDI inflows in to India stood at 35.16 billion US dollars, a near flat growth.
Nevertheless, says the OECD Review: "Investment remains insufficient to meet India’s needs, particularly in infrastructure. Current efforts to strengthen and liberalise the regulatory framework for investment need to be intensified and India’s well-developed economic legislation implemented at an accelerated pace both at national level and right across India’s states and union territories."
PROGRESS
The report also highlights progress in three areas:
First, the regulatory framework: India has made huge steps in improving its regulatory investment environment: the “license rajö, which shackled industry with numerous unnecessary permits, has been largely dismantled. Crucial issues for investors have started to be tackled by the Indian Government, such as IPR (intellectual property rights) protection which has been strengthened. The Competition Commission has just started work this summer and the corporate governance framework has been improved.
A more open trade regime is replacing import substitution and protectionism. Much of the economy has been opened to foreign investment. Sectoral FDI restrictions have been eased and foreign ownership caps lifted. Since 2000, the FDI regime has been an OECD-type “negative listö approach in which all sectors not on the list are open to foreign investment. In most manufacturing sectors 100 percent foreign ownership is now possible and much FDI now comes through the “automatic routeö. Foreign exchange restrictions relating to investment have been relaxed.
Second, public ownership of industries was substantially reduced as many sectors which were previously reserved for the public sector have been opened to private enterprises, including foreign investment.
Third, experimental economic zones have been set up to test further investment liberalisation measures. The government has concluded many bilateral investment promotion agreements and double taxation avoidance agreements since the mid-1990s. Foreign-owned companies are now taxed the same as domestic enterprises.
"In short, the overall framework for investment, both domestic and foreign, is becoming more supportive in order to reap the full benefits of FDI for India’s growth perspectives," Gurría said presenting the review in New Delhi.
CHALLENGES
But many challenges remain. "As Prime Minister Manmohan Singh pointed out in his speech at the Indian Economic Summit last November, the development of high-quality infrastructure is an essential requirement for India’s rapid growth," Gurria recalled.
India has an ambitious programme of investment to remedy deficiencies in all key infrastructure sectors: power, roads, ports, airports, telecommunications, irrigation and urban infrastructure. While some of these investments will be undertaken through the public sector, the Government of India has called for private investment, including foreign direct investment, to play a large and growing role in achieving these targets.
OECD Investment Policy Review discusses policy options that may help India achieve its full potential, Gurria pointed out. It suggests a further easing of remaining FDI curbs to support the government's important social and development goals. Many of the remaining FDI restrictions apply to sectors where productivity and growth need to be enhanced, such as banking, insurance and retail distribution.
Another major challenge in India, according to the Review, is to realign economic growth with equality perspectives: While national economic growth has been impressive since 1991, the gap between the richer and poorer Indian states has widened. "This trend needs to be reversed if the government is to reduce inequalities. Poorer, slow-growth states may start catching up if they accelerate implementation of central government policies to promote investment."
While the central government has reduced the number of approvals needed for new investment, administrative procedures need to be streamlined at state level. India’s plan to set up a panel of state industrial ministers to encourage state level reforms can help do this, the OECD Review suggests. "The Indian government could also set up an inter-state forum to evaluate the costs and benefits of states’ investment incentives, including their impact on other states. The OECD has developed a Checklist for FDI Incentive Policies which can be used to evaluate foreign investment incentives."
Comparing states’ FDI performance requires reliable FDI statistics. OECD countries are also grappling with this thorny problem and will be happy to share their experience with India.
Gurria noted that India was rightly proud of its long tradition of rule of law. "But for investors -- both domestic and foreign -- significant delays in justice can mean bankruptcy -- and hence a risk too big to take. Strengthening the capacity of the judicial system could make a big difference to investment."
COOPERATION
The Organisation for Economic Cooperation and Development considers this Review "a landmark in the growing cooperation and enhanced engagement between India and the OECD". India has participated wholeheartedly in the preparatory work at many levels of government and over the whole period from gestation to completion, it adds.
"For our future cooperation we would like to propose four areas of work, which have been highlighted in the report and have featured in our discussions with the Government of India," said Gurria.
- Joint future work on green growth, an important driver for India’s sustainable development.
- Promoting infrastructure development through public-private partnerships.
- Developing nationally consistent regional FDI statistics.
- The launch of a review of the regulatory policies of India, just like OECD has done with other countries like Brazil, China and Russia.
The OECD reports regularly to the G20 on crisis-related measures taken by governments that may have implications for international investment. "Keeping international investments flowing freely is a vital element in global recovery, said Gurria, adding: "This is part of the overall co-operation between the OECD and India in support of fostering a stronger, cleaner and fairer world economy. This is an objective we will achieve only if we work together."
$2-TRILLION ECONOMY
Meanwhile Enam Securities, a leading capital market intermediary in India, says: India will be a two trillion US dollar economy in the next five years as its GDP growth is likely to average at 12 per cent in nominal terms powered by a huge consumption demand.
“India’s GDP is likely to grow at (an) average 12 per cent in nominal terms. Hence, India will be a 2-trillion US dollar economy by 2014-15,ö Enam Securities Head-Research, Nandan Chakraborty, and economist Sachchidanand Shukla said in a report titled ‘India Strategy’ released Dec. 18.
This growth will be led by the huge consumption demand in sectors like FMCG (fast moving consumer goods), power, auto (small car hub), IT and pharma, it added.
The brokerage firm said insurance companies, financial services and equity markets will flourish as the country’s annual savings pool grows to 700 billion from 400 billion US dollars at present.
öMore than half of this (700 billion US dollars) could flow into financial savings. With favourable demographics and average seven per cent real growth, India can sustain more than 30 per cent savings rate akin to the Asian tigers, or China and Japan. This will transform the domestic financial services space,ö Enam said.
Life insurance penetration in India, which is already a one-trillion US dollar economy, is estimated to reach a level of 4.4 per cent over the next two years as insurance companies focus on expanding into rural India, the report said.
Life insurance penetration in India stands at about 4 per cent at present. Only 26 per cent of rural and 60 per cent of urban population have life insurance cover.
öThere is a huge scope for premium expansion. Life insurance penetration is relatively low in India with premiums/GDP at 4 per cent versus 6 per cent for developed nations. India is the fourth largest life insurance market in Asia ex-Japan and has recorded high 31 per cent CAGR (compound annual growth rate) over the past six years in total premiums,ö Enam said.
TRADE
Underlining India's "greater integration with the world economy", the Finance Ministry has said that the country's global trade engagement has risen to account for 54 per cent of its GDP (Gross Domestic Product) in 2008-09, from 30.9 per cent in 2003-04.
India’s merchandise trade rose from 23.7 per cent of the GDP in 2003-04 to 41 per cent in 2008-09. The paper said, “If the services trade is included, the indicator is higher at 54.2 per cent in 2008-09, reflecting greater degree of openness.ö
The principal economist of Credit Rating and Information Services of India (CRISIL), D K Joshi, said: “In the last 4-5 years our exports and imports are growing phenomenally...Increasing external trade reflects India’s greater openness. However, the ongoing global economic crisis has briefly interrupted the integration of India with the world economy.ö – GLOBAL PERSPECTIVES |
