Perception Vs Reality: Why India ranks 20th in actual FDI receipts when it is the 2nd most attractive destination for FDI?

Abstract

The UNCTAD world investment report 2008, places India in the 20th rank in the terms of FDI receipts in 2007. In fact, India moved from 18th rank in 2006 to 20th rank in 2007. On the other hand, in 2007, India is named as the second most attractive destination in the world, next to China. The attractiveness is determined based on a survey of top executives of transnational companies. This mismatch in the attractiveness of India for FDI and actual rank creates a necessity to study the reasons behind low FDI receipts. The objective of the study is to determine the reason for the mismatch. The study concludes that India though an underperformer till 2005, has moved away from the scenario. India is in the beginning of the high growth in terms of FDI receipts, with the year 2006-07 being the tipping. Countries in latin America, ASEAN and even china has followed this pattern – a sluggish growth for 10 to 15 years followed by a sudden spurt in growth. A bandwagon effect could be seen after the tipping point. In India, the reasons are presence of a well developed capital market, reinvestments, tax reform and the emergence of clusters. When, FDI as a percentage of GDP is considered, India received an abysmal 0.8% in 2005, compared to 3.5% in china and 2.6% in South Africa. In 2007-08, India received 2.24% of its GDP as FDI compared to 2.14% in china. This scenario is comparable to the numbers of the Latin American nation. In India, we expect the percentage to grow a little, before it stabilizes around the current range. Till now, FDI in India is primarily efficiency seeking and in the coming years we expect it to be more of market seeking. Two areas, manufacturing and infrastructure, are expected to attract huge FDI in the next ten years. The study focuses on infrastructure, the pattern followed till now, the hurdles faced and the way forward. There are many studies conducted in this area and plenty of recommendations available. Most of the solutions offered to clear the hurdles in infrastructure have been done after a critical study on the recommendations proposed by various studies.