Saturday, 1 October 2011

Inter-Regional Disparity of Foreign Direct Investment In India after Economic Reforms

Brajesh Srivastava
                                                      Research Scholar, Economics

                                                      University of Allahabad.
The existence of substantial regional disparity in a large country, such as India, in physical endowments, climate conditions, social traditions and differences in the initial levels of development, growth rates are bound, to vary among regions. All the five year plans stressed the importance of balanced regional development and Policies were designed to direct more investment to the relatively backward areas. Nevertheless, regional disparity continues to remain a serious problem. In the post reforms period, due to deregulation, the degree of control of the central government declined in many sectors. State government can now take more initiatives for economic development than ever before. After adoption of economic reforms, in the changing scenario, it is the task of state policy to implement compensatory measures to push forward the lagged regions and spread growth and development more evenly. However, during almost the entire period of national planning, as is well known, a steady widening of regional disparities has taken place. This disparity is in growth rates, poverty and also in attracting FDI.
            In India, globalization has produced paradoxical results in the sense that the states have been engaged in fierce competition among themselves for foreign direct investment, giving rise to a new division among the states such as developed and backward states. Many states have entered the FDI race which they now see to be inherent to development strategy. They hold ‘location tournaments’ and compete for FDI through tax benefits, concessions and incentives like land or loan allocation priorities. Even then just a few get the lion’s share of FDI and skewed inflows account for much of the difference between states. Extremely skewed inter-state distribution of foreign direct investment (FDI) has also contributed to increased inter-regional disparity in India. State-wise data on (aggregate) FDI approvals between 1991 and 2002 show that only a handful of states have managed to attract a very high share of FDI, it can be seen that the top 10 Indian states attracted more than 63% of total foreign direct investment in India. In contrast, the bottom 10 states together received less than 1% of total FDI. There is also a strong regional disparity in the pattern of FDI flows, with the southern and western states faring much better than the other parts of the country. Three southern (Andhra Pradesh, Karnatka and Tamil Nadu) received more than 20% of total FDI, while Maharastra and Gujrat (both in western India) received 17.35% and 7.7% of FDI respectively. In contrast, the seven North-Eastern states together received only 0.03% of total FDI during the same period. This unequal distribution of FDI across states in India is not unexpected, as FDI inflows tend towards states with better infrastructure and development. The concentration of FDI in a few pockets in India therefore did not help to reduce inequality during the reform period.                              
            Apart from its much skewed regional distribution, FDI flows in India also exhibit a strong sectoral bias. In India, a very high proportion of FDI has gone into high-end consumer goods and financial services like banks, insurance companies land consultancy services. It has also flowed into information technology areas where India’s human resources and research and development (R&D) base have pockets of international competitiveness. A large part of the inflow also went into the non-tradable infrastructural sector, attracted by special concessions, including guaranteed returns, offered by the government for such investments. However, benefits accruing from FDI in terms of fixed investments, exports and technological upgrading have been less than expected. This happened because since the 1990’s a significant part of FDI came in the form of mergers and acquisitions(M & As) As opposed to green-field FDI investment, M&As do not create productive capacity and hence do not benefit the host country as much. In fact, there are some negative consequences if M & As led to the formation of monopoly powers in an industry. Also typically with such mergers, employment stagnates or falls. This often counter balances or even negates the increase in employment of multi-national corporation(MNC) affiliates, so that employment increases tend to be the least buoyant of all the major variables associated with MNC production.
            Secondly, though FDI worth around & 30 billion has come into India since 1991, it has not contributed to an increase in exports. Most analysts suggest that a high proportion of FDI came into India during the early 1990s to jump the ‘tariff wall’ and service the Indian markets, rather than to use the country as an export hub. There were also apprehension that the initial inflow of direct investment would be followed by large and persistent outflows on account of imports, royalties, technical fees and dividends, with adverse balance of payments consequences. There have also been a few instances of anticompetitive practices by some large foreign companies in India. The most famous cases include the tussle between the government of Maharashtra and the entry giant Enron and the buyout of a rival Indian cold drink company Parle Exports by Coca Cola.
            Pattern of FDI inflow in India suggest that the inflows are highly concentrated in a few states and in some sectors where India can offer either a big domestic market or cheap and skilled labor. The concentration of FDI in relatively small areas has created some illusion of prosperity, but has hardly done anything to reduce overall levels of poverty or inequality in India. On the other hand, in a bid to attract FDI to their states, many state governments have completely overlooked the rural sector and concentrated their development expenditure in the urban areas. This has resulted increased rural urban inequality and has give rise to political tension in these states.
            There are ‘haves’ and ‘have-nots’ amongst states and before a foreign investor commits investments in a ‘green-field’ venture in a region, he reviews the state’s infrastructure position and whether it has an enabling government. The five high FDI inflow States have better infrastructure. Their rail and road networks, airports and seaports, dependable power supplies, communication networks, skilled manpower and competitive labor markets make them more attractive. Plus, states have a Major role to play in project implementation, which explains why an investor-friendly, transparent official decision-making process is so important.
          But even if the above factors influence FDI, they also affect investments in general. Hence, high FDI-receiving states also get lots of domestic corporate investment as part of a sort of ‘crowding-in’ effect. Internal investment and FDI tend to choose the same states /regions for ‘co-location’ benefits. A foreign investor’s presence alongside a domestic one’s benefits both from external economics. Domestic firms also want to be located near foreign ones for the spillover benefits of technology and better management practices. That is why Bangalore and Hyderabad are sought-after destinations for IT-related FDI of late; Maharashtra too has, shown its capacity for receiving FDI in the Knowledge sector. Foreign investors also want to capitalize on the scientific Manpower outputted by technical institutes like the IISc and IITs, and want to use the R&D that emerges from central laboratories. They also want to benefit from the location of technology-intensive PSUs (like BHEL and BEL) and India’s IT firms.
            FDI, thus, does not occur in a vacuum. Forward and backward linkages demand the presence of other foreign and domestic firms in the same regions. For instance, FDI in Tamil Nadu’s automobile sector has seen Ford, Hyundai land Mitsubishi setting up shop in Chennai. A strong Manufacturing and engineering industry, supported by a well-developed component-supplier base determine these investments. The Murugappa and Rane groups, and companies under the TVs umbrella have large, diversified, product portfolio related to the auto industry.
            Mumbai, Chennai, Bangalore, Mysore, Pune and Hyderabad also emerged as clear winners in the recent Business. Today-Gallup survey ranking cities by quality of work-life, social life and the suitability of doing business. These cities have a large number of overseas investors.  In other words, FDI is attracted by better infrastructure, high levels of development, prominent centers of Industry and a relatively more urbanized populace. So FDI, instead of driving growth, is really gravitating to those states which are already having high levels of FDI receive more. We must bridge the investment-gap, and the resultant development-gap. But how?                                         
Heads of various state governments are used to going abroad and wooing foreign investors by promising all types of sops. But the taxation benefits and special concessions they offer are only short term measures, where-as foreign investors seek advantages going beyond just financial package. So, states must do much more in a sustainable manner to achieve substantial investment inflows.
Thus the massage is clear- improve basic infrastructure, build up human capital, quicken official dealing and make them more transparent and up hold the rule of law. Develop and promote the state into a hub for a particular industry, as have Tamil Nadu, Andhra Pradesh and Karnataka. Also, spread investment growth into new regions to increase the total size of the incoming FDI cake. States like Himanchal Pradesh and Uttarakhand, for example, have vast expanses of virgin territory and can become important FDI locations if they improve basic physical infrastructure-especially telecom-and arrange for skill- based training to enrich their literate manpower. The ultimate aim must not only be to bring in more FDI but also to achieve a high volume of investment in general and spread it to new destinations in particular.
1 Parthapratim Pal and. “Inequality in India: A survey of Jayanti Ghosh- recent trends”, Economic and Social Affairs, DESA working Paper No. 45, July 2007.
2 The Economic Times—“Niceties of FDI inflows into States”, 13 March, 2004.
3 The Economic Times--“Regional disparity widens, rich States corner benefits of   reforms” .23.05 2006.
4 S.Mahendra Dev--“Post-reform regional variations” ,  7 January,  2008.
5  Professor Dr. Harihar-“Globalization and Indian Federali-  Bhattacharyya-- sm: Current    Trends”, An In-house  Seminar presentation at the institute  Of federalism, Fribourg(switzerland),16 May, 2007.
6 Raja J.chelliah and:”Strategy for Poverty Reduction and Narrowing Regional K.R.Shanmugam, Disparities”Economic and Political weekly, August 25, 2007.