Chasing the dragon

N Chandra Mohan

There is no point belabouring comparisons with China that attracts nine times more foreign direct investment (FDI) than India gets every year.

There are no prizes for guessing that the dragon is a more attractive destination as foreigners are impressed by the infrastructure, speed of approvals and the ease of doing business, among other things, in that country.

Even Indian companies that invest there find the business climate more salubrious than back home. For such reasons, China is way ahead in the FDI sweepstakes with inflows of $87 billion as against India’s inflows of $9.5 billion expected this year.

A top executive of Sundaram Fasteners, the Chennai-based auto parts giant which set up shop in the Zhejiang province in eastern China, related a contrasting picture of the environment in both countries.

While setting up one of the company’s facilities in neighbouring Pondicherry some years ago, he ran endlessly between the electricity board and the city planning department to secure a no-objection certificate.

But in Zhejiang, he was surprised by the fact that Chinese officials provided power within two weeks of applying, including a dedicated power line.

The latest World Bank report on Doing Business 2007 also brings home the contrasts in the business environment of both countries.

Starting a business in both countries takes 35 days but winding it up takes 2.4 years in China as against 10 years in India. The differences get more pronounced when it comes to indicators like enforcement of business contracts and trading across borders.

For instance, the number of procedures from the moment a plaintiff files a lawsuit until the moment of payment is 31 spread over 292 days in China as against 56 procedures over 1,422 days in India.

Chinese exporters require six documents over 18 days while their Indian counterparts have to produce 10 documents over 27 days.

The export cost per container shipped is $335 in China when compared to $864 in India.

The picture is similar on the import front as well with the import cost per container averaging $375 in China while it is much higher at $1,244 in India. The World Bank report also includes

China among the top 10 reformers in the world for registering substantial improvements in 2005/2006 with regard to starting a business, getting credit, protecting investors and trading across borders.

While all this clearly indicates China’s edge over India, these indicators cannot by themselves account for the nine times higher FDI than India gets every year. There are reliable indications, in fact, that the gap between the two countries (although substantial) is much narrower than popularly believed.

Five years ago, Guy Pfeffermann, the then chief economist of the International Finance Corporation, argued that China’s FDI levels need to be halved if round-tripping — capital originating from the mainland that re-enters as FDI — is taken in account while India’s FDI levels are actually much higher.

Pfeffermann was referring to the fact that India’s definition of FDI till then was more restricted and not in line with IMF standards.

The Indian government subsequently adopted a more liberal definition as per international practices which naturally upped inflows by 70-80 per cent over the $2 billion to $3 billion range they were stuck in for many years.

But even if we halve China’s FDI, it still is 4.5 times higher than what India is expected to attract this year.

This FDI gap can further narrow if India gets its reforms act together to make the business environment more investor-friendly which can, in turn, clear the decks for big-ticket FDI.

According to the Investment Commission set up by the UPA government, investment opportunities worth $500 billion would emerge in the next five years, of which $250 billion exist in infrastructure alone and $130 billion in manufacturing.

Realising this prospect is indeed the challenge before India and is bound to profoundly alter where this country stands relative to China on the FDI front.

However, a major handicap in attracting more FDI is a persisting delusion among

India’s officialdom that the rest of the world is queuing up to invest here. Nothing can be further from the truth. Multinational corporations have lots of options to invest in various emerging economies and they will go to even a small country like Georgia if the investment climate is more inviting.

The latter, by the way, heads the list of top 10 reformers in the World Bank report.

India can close the FDI gap with China by further streamlining procedures, improving infrastructure and reducing the hassle component faced by investors.

The writer is an economist and business commentator.