After years of struggling to show some halfway respectable levels of foreign direct investments in the country, the government and most economic observers would have greeted the FDI numbers for last year as a pleasant surprise. At more than $15 billion, the figure had jumped sharply in just one year. Now the government has got ambitious, and wants to double that number this year, to $30 billion. By the look of it, it might meet its target. In which case, at 3 per cent of GDP, it would rank pretty well with Chinese FDI levels -- something no one would have believed possible two short years ago.
Lest anyone leap from this to the conclusion that the current level of FDI flows is a reflection of India coming into its own with regard to manufacturing, it is important to carefully study the numbers and to understand the story that they tell.
To be sure, there is FDI coming into manufacturing -- you just have to look at the investments being made or planned by Nissan and Toyota, Nokia and Samsung, Alcatel and Ericsson, and Cisco and Suzuki to get the picture. Substantial foreign investments are also being made in software services (Flextronics, for instance, has bought at least two Indian firms), in research (by IBM, Intel and SAP) and in the financial sector -- and much more would come in if the banking and insurance sectors were opened up a little more. But these are not manufacturing, which has been the weak link in the chain.
But after growing slower than GDP for most of the 1990s, Indian manufacturing has gained momentum in the last few years. However, as with FDI, the successes have been in areas like automobiles and auto parts, mobile phones and pharmaceuticals -- all parts of what one might call knowledge-based manufacturing. The government itself is pushing hard in this direction, focusing now on providing generous incentives for chip fabrication units (the Semindia project has been in the headlines) and for computer manufacture and assembly (by companies like Dell). Notice what is missing in both cases: the country's traditional areas of strength, like textiles and leather products, which have much greater employment potential, especially for school-pass youngsters who have not gone on to higher education.
To point to what is missing, even when successes are being notched up, might seem like giving in to the national pastime of finding fault with good news, but there is a larger point here. The reason why textiles are not attracting much foreign investment, despite the opening up of the global trade in textiles, is Bangladesh's greater attractiveness in this field: labour costs are lower, and the country as a whole is focused on making a success of textiles.
In India, by way of contrast, few have cared to focus on the failure to capitalise on the new trade opportunities in this sector (textile export growth has been slower than overall export growth); and what little domestic investment is taking place is because of the special technology upgrade scheme offered by the government. Much the same can be said about leather, where too Bangladesh is emerging as a serious competitor. This would suggest that the government is making a mistake in continuing to ignore labour market reforms -- it is hurting investment and job creation.
As always, one test is whether foreign investment is coming into the country to tap the domestic market, or for exports. Much of the FDI that we now see (for making mobile phone handsets, for instance) is a direct consequence of the rapid growth of the Indian market -- which is of course a good development. But notice the contrast when it comes to global investors in automobile and auto component facilities, for they also see significant export potential from India. Michael Dell is setting up a major computer-manufacturing unit in Vietnam; all he is planning for India is an assembly unit. In other words, we have made progress in manufacturing, in some specific sectors; for the rest, it is still a story of missed opportunities.