Updated: March 2, 2010 09:39 IST

Is FDI a dependable horse?

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There is a flood of literature on foreign direct investment (FDI) and its impact on China. In many quarters, there is wistful regret that India has not been able to match China in seizing FDI flows. This book falls under this genre.

It is indeed daunting to bring out yet another book, unless one has new insights or data to provide. Sadly, the area is shrouded in myths and miasma and remains ideologically contentious between the Right and the Left.

Over the years, China has shown extreme caution and pragmatism in its strategies, with its policy changing contours to reflect changing needs. It was Premier Deng Xiaoping's vision to effect a transition from the planned economy to a market economy, gain a comparative-advantage following development strategy, and integrate fully with the global economy.

Premier Deng was gambling with his political future when he embarked on this strategy. He pursued it regardless of the attacks from the ‘old guard' within his party, and it worked wonders.

The Special Economic Zones, the key component of that strategy, prepared the ground for the integration of Hong Kong with the mainland; brought the overseas Chinese networks into the mainland as major investors; and integrated the economies of neighbouring Asian countries with China, turning it into a manufacturing hub. It is doubtful whether the Indian version of the SEZs, which are now mired in litigation and political disputes, will come into their own and evolve into integrative agents of sorts.

China price

China emerged as a major attraction for FDI and analysts attribute it to what they term the “China price”. Some of the distinct advantages it offered are low labour costs, a highly efficient form of production described as ‘industrial network clustering,' and stable exchange rates. What is significant about the FDI flow into China is that 60-70 per cent of it came from Asia-based American and European companies.

A substantial part of the cost advantage stems from the extraordinary infrastructural support — transport, ports, power and so on. “Industrial clusters,” unique to China, were developed in the wake of the expansion of product-specific SEZs, industrial and technology parks and similar other arrangements. India cannot boast of a similar “India price.”

In the preparatory years, China invested billions of dollars to promote infrastructure across the country. It did not depend on external aid or assistance to create them. They were all funded by state-owned banks and resulted from ‘directed credit,' much reviled by monetary economists.

This was witnessed again in 2008 under the stimulus programme of $570 billion launched to revive the crisis-hit economy. China has succeeded in rebalancing the economy and it is seen as the first to pull out of the crisis.


On the other hand, India has tended to lean on private investment (Indian or foreign) to promote infrastructure and has been lagging behind. The lesson from China is that infrastructure may bring FDI; but FDI is not a dependable horse to reach infrastructure goals.

Any attempt to compare the experience of China and that of India will necessarily throw up theoretical or organic issues. Although the author reflects on some of them in passing, he has not provided a coherent or integrated picture.

Quite a few chapters are full of officialese and read more like the manuals of Ministries. It is not clear why the author has not touched upon the November 7, 2007, guidelines of the National Development and Reform Commission (NDRC) that brought about drastic changes in the FDI policy.

Ashok Kundra's overemphasis on the revolution in IT/ITES and Telecom service sectors is the refrain of Bombay Inc. His plea for empowering the States to clear investment proposals is impracticable under our conditions. If the Centre does not have the fiscal resources necessary for funding infrastructure, how will the States have it?

The author tends to offer comments that do not flow from the earlier analysis, and are often contradictory. Overall, this is an instance of great expectations belied.

INDIA CHINA - A Comparative Analysis of FDI Policy and Performance: Ashok Kundra; Academic Foundation, 4772-73/ 23, Bharat Ram Road (23, Ansari Road), Darya Ganj, New Delhi-110002. Rs. 795.

Keywords: IndiaChinaFDI policyDevelopment

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