BW Communities

Investing In Imbalance

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[There was a wonderful phrase in the '90s that defined the debate on foreign investment in India. Potato chips vs computer chips. Team Manmohan Singh that has to revive the economy, will remember this well. The phrase sounds a bit archaic now, but it was at the centre of a raging political and economic debate. Many corporate and political leaders felt that India should encourage investment in sectors that would strengthen the economy. Investment in sectors like technology and automobiles was preferred to sectors like food retail and drinks. While this was a shallow argument on the face of it, there was some merit to it. Investment in core sectors would create the enabling environment for all other investment to prosper and profit. A country can't and shouldn't create a system of apartheid for investment. Investment in both computer chips and potato chips should be freely allowed. Ironically though, India is back in a situation where it is encouraging potato chips over computer chips. Recent FDI in India have been in consumer product industries. So IKEA, Coca Cola, Dunkin Donuts, Krispy Kreme, Starbucks have announced ambitious multi-billion dollar expansion in India. That's very well. It will surely energise the food and retail sector and offer even more choice to consumers. But where are the big FDI announcements in energy, transportation and hardware sectors? By going slow on reducing red tape and removing sectoral caps, India is actually discouraging serious investment. FDI proposals in defence production, pharmaceuticals and telecom hardware are viewed with skepticism and suspicion.  Unless investment in core sector grows,  business plans of consumer products companies that are hoping for rising personal consumption will be adversely affected. To add to this investment imbalance, the government is increasing the limits on portfolio investments. Even though the government says this is to support the rupee,  this will lead to problems later. Fickle investment is being encouraged while loyal money is being made to negotiate an obstacle course.  India has been allowed portfolio investment ahead of FDI. China did the opposite. It sought, encouraged and nurtured FDI projects while giving secondary priority to portfolio investment. This allowed China to create employment and develop heft in manufacturing sector. India found it easier to grow in services and financial sector. Manufacturing grew at a slower pace, having to jump through many more policy hoops. Even domestic investment in stuck in the same quagmire. With high cost of power, credit and talent Indian companies are losing their competitive edge. Small and medium companies are stagnating or shrinking. The larger groups are straining at the leash and desperately seeking avenues of growth. Until the India growth story resumes, leading companies are busy expanding abroad. The Worldwatch Institute in Washington DC, a global environmental think-tank, reports that India is among the three emerging economies, along with Brazil and China that is acquiring the most land elsewhere. In the last few years, Indian firms have acquired almost 7.4 million hectares in 129 separate deals. The land has been used for agriculture, forestry for wood or fibre, industries and mineral extraction, including petroleum. Consumers want potato chips, donuts but also power and roads. Mostly, they want more and better paying jobs that domestic and foreign direct investment can deliver.  The imbalance in investment has to be corrected soon to ensure more consumers have more money in their pockets. India needs investment that increases income options, not just spending options. (Pranjal Sharma is a senior business writer. He can be contacted at pranjalx@gmail.com)