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.
References
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.
