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July 27th, 2017

Foreign investment in India: Recognising and addressing regional disparities

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Estimated reading time: 5 minutes

Editor

July 27th, 2017

Foreign investment in India: Recognising and addressing regional disparities

1 comment

Estimated reading time: 5 minutes

Successive Indian governments since the 1990s have put great emphasis on increasing foreign direct investment, with significant success. However, at the moment the investment is unevenly distributed and as a result many of the eastern states in particular are not reaping the benefits. Tridivesh Singh Maini and Sandeep Sachdeva argue redressing the imbalance should be a key priority.

In order to achieve robust economic growth rates, India needs to consistently draw substantial amounts of Foreign Direct Investment (FDI). In the wake of the 1991 economic reforms, there has been a strong bipartisan consensus across the political spectrum with regard to the importance of FDI. This is reflected by the fact that the current BJP-led administration, as well as the Congress government that preceded it, have made significant efforts to attract investment from different countries.

The UPA-I government witnessed a 625% increase in FDI, which rose from US $6 billion in 2004-05, to US $41.8 billion in 2008-09. During UPA-2 investment dipped, but it is now once again a priority and for the last two years India has attracted record amounts of FDI. The total inflow received during April 2016-March 2017 rose 8 per cent year-on-year to US$ 60.08 billion.

This indicates that the current government’s endeavours to improve the ease of doing business and relax FDI restrictions are yielding results. As part of a series of reforms, it increased the upper limit of investment from 26% to 49% in the insurance sector, and launched the flagship ‘Make in India’ initiative in 2014, under which the FDI policy for 25 sectors was liberalised. Last year in June, the NDA government announced further reforms in key sectors, allowing 100 per cent FDI participation in companies in key sectors such as defense, civil aviation and pharmaceuticals. In addition, PM Modi recently chaired a meeting to review current FDI policy of the country, with the aim of further simplifying it and opening other key sectors such as retail and construction.

Growing regional imbalances

Although the growing FDI is welcome, it is mainly concentrated in few states, namely Maharashtra, National Capital Region (NCR), Gujarat, Andhra Pradesh and Karnataka. As a result the benefits are predominately reaped by these states, which are already among the wealthiest. According to a Department of Industrial Policy and Promotion (DIPP) report from January to November 2016, these five regions received US $34.7 billion, i.e. 80 per cent of the total FDI received during this period. On the other hand Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Uttrakhand, Uttar Pradesh and West Bengal received around US $200 million, just 0.5 per cent of total FDI for the same time period.

The eastern states have been making efforts to attract FDI, for example by organising Investor Summits and sending delegations overseas to court investors. Both the central and state governments are trying to make India more attractive to foreign capital, for example by investing in infrastructure development. Chhattisgarh’s government introduced reforms in power sector, which not only helped the state to cut down its aggregate technical and commercial (AT&C) loss but also enabled it to become a power surplus state. Gujarat, Madhya Pradesh and Rajasthan have also moved amendments to reform the labour laws.

Political divides

In an effort to increase transparency and efficiency, as well as to foster competition between states, the World Bank and DIPP launched an ease of doing business table ranking all states. Scores were awarded depending on the extent to which they had implemented a 340-point business reform action plan (BRAP) developed by the DIPP in 2015. This system that has somewhat been effective in incentivising reform, as four of the seven states with the lowest income levels in India found a place in the top ten ranks of the 2016. Chhattisgarh came 4th, Madhya Pradesh fifth, Jharkhand seventh, and Rajasthan eighth.

However, it is notable that all these high scorers currently have BJP/NDA governments. Other low-income states such as Bihar, Orissa and West Bengal are currently ruled by the regional parties, which are not on particularly good terms with the BJP at the centre, raising questions as to whether coordination between centre and state has impacted these states’ ability to make the most of FDI opportunities. It is essential that governments at all levels move beyond the party politics and work jointly to address the key policy issues which are preventing more investment from entering India.

Conclusion

India would do well to take a cue from China on this issue. In the first stage of economic growth only China’s coastal provinces experienced significant growth but from the 1990s onwards concerted efforts were made to develop the regions which were lagging behind. One specific strategy introduced was the Great Western Development Strategy (Xibu Da Kaifa), launched in January 2000, which included industry-specific plans and targeted incentives to attract investment to the less developed central and western provinces.

A 2016 report by a rating agency (Smera) indicated that by 2035, Eastern India could account for a quarter of national GDP. This indicates the region possesses immense potential, but the right policies and support are needed to realise it. For the overall development of India, it is necessary that all parts of India receive equal investment and attention. As PM Modi emphasised in a 2016 speeche, “If we have to develop India, the chariot of development needs to run on two wheels- eastern and western India.”

Cover image credit: Beau Lebens CC BY-NC 2.0

This article gives the views of the authors, and not the position of the South Asia @ LSE blog, nor of the London School of Economics. Please read our comments policy before posting.

About the Authors

Tridivesh Singh Maini is a New Delhi based Analyst associated with The Jindal School of International Affairs, OP Jindal University, Sonipat.

 

Sandeep Sachdeva is a New Delhi based Policy Analyst and a graduate of the Jindal School of International Affairs.

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