EconoMonitor

The Wilder View

India: FDI and Saving are Key….

India is in the headlines today.

From Bloomberg:

J. Kumar Infraprojects Ltd. plans to raise as much as 1.01 billion rupees selling 5.6 million shares to large investors, according to a share-sale document.

From Bloomberg:

GE Hitachi Nuclear Energy, which plans to build an atomic power plant in India, said as much as 70 percent of the components may be made locally to reduce costs and also exported to customers in Europe and the U.S.

From the Financial Times:

International power companies from Russia, France, the UK, the US and Canada are flocking to India seeking opportunities to help one of the world’s fastest-growing economies meet its energy demands. The contribution of nuclear energy in India is forecast to rise from 4,000MW to as much as 470,000MW over the next 40 years.

India is hot. And accordingly, multinationals around the world want to set up shop and produce directly in the world’s second most populated country, 1.16 billion and growing (foreign direct investment, or FDI).

investment_saving.PNG

As is illustrated in the graph above, foreign domestic investment facilitates the growth of the capital stock that would be unattainable given its relatively lower domestic saving. FDI, or inward fixed investment, is one of the most important factors in facilitating growth for a developing economy (one whose investment growth is not subject to diminishing returns).

Recently, India has made much progress in attracting new FDI – its growth surged in 2009 in spite of the global economic recession.

india_chart.PNG

The chart illustrates the inflow (not net) of foreign direct investment to Brazil, India, and Russia. Stemming partially from big FDI (hence capital investment), India grew quickly in 2009 – 3Q growth was reported to be a huge 7.9% y/y.

And the OECD recently hailed India for its efforts to lower barriers to entry:

The OECD’s Investment Policy Review of India says India has designed policies to encourage investment as part of market-oriented reforms since 1991 that have paved the way for improved prosperity.

“Restrictions on large-scale investment have been greatly relaxed. Many sectors formerly reserved to the public sector have been opened up to private enterprise. Import substitution and protectionism have been replaced by an open trade regime,” the OECD report notes.

But further reforms are needed. India’s policy framework for FDI still remains restrictive compared with most OECD countries. Meanwhile, its investment needs remain massive, with poor infrastructure holding back improvements in both living conditions and productivity.

Point: India recently made great headway in opening borders to direct investment, but more is needed. For example, India’s foreign direct investment levels are similar to the other BRIC countries (ex China in the first chart), but per-capita income is by far the smallest.

ppp_chart.png

Going forward, saving (including the government, which poses a very large risk, and for another post) and investment are critical to the outlook of the economy. It’s up to policymakers in India to keep the economy on a sustainable growth path.

The Wall Street Journal posted a nice article today on the need to stimulate opportunistic entrepreneurs in India. Interesting stuff.


Originally published at News N Economics and reproduced here with the author’s permission.

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