OPINION – Foreign Direct Investment: For Developing India Faster

India, while it is expected to become the next generation global superpower, building on its population as well as military prowess, it struggles to safeguard its economic well-being.

The world is undergoing rapid globalization, where international capital flows are accelerating and countries are deepening their investment and trade relationships. One type of international capital flows which has received growing attention, especially among policy makers of developing countries are foreign direct investments (FDI).

FDI, in Mukherjee’s definition, is the most important form of investment or capital flows made into domestic structures equipment, and organizations that has several positive effects which include productivity gains, technology transfers, the introduction of new processes, managerial skills, and know-hows in the domestic market.

These positive effects of FDI stimulate economic growth, and should thus improve the living standards of people in the receiving country. However, at the same time, FDI might increase regional inequality since many different regions of a country usually do not receive FDI in equal amount and similar manner. For example, despite overall the large FDI inflows India has had so far, the majority have been mostly concentrated in the economically advanced states like Maharashtra, Delhi, Karnataka, Tamil Nadu, Gujarat, and Andhra Pradesh, while states like Bihar, Uttar Pradesh, and Odisha have only got a trickle portion of the total.

In my opinion, the cause of regional disparity of FDI flows in India is very similar to that of China’s. In both countries, majority of the FDI flows to relatively developed regions and states, while less developed regions receive little FDI due to poor physical, institutional and social infrastructure. In China, Eastern zone provinces attract higher FDI flows because of its high per capita income and living standards reflected into better socio-economic indicators, better infrastructure facilities in terms of electricity, road and rail network and also higher international orientation in terms of their openness to trade. Similarly, in India, regions such as Gujarat, Tamil, and New Delhi attract more FDIs compared to Uttar Pradesh and Bihar because those states have much higher per capita income, higher industrial outputs, bigger market size, significant number of skilled human resources, as well as good policy environment.

This is a huge problem because uneven distribution of FDI flows among states and regions can lead to rising disparity in regional economic growth, as well as a more serious rural-urban divide. For example, during the 1990s, when there was an economic reform to attract FDI by reducing regulations for certain sectors and liberalizing capital flows in India, advantaged regions such as New Delhi prospered due to FDI inflows along with skillful migrations into the city domestically, while disadvantaged regions such as Mumbai, due to low level of FDI flow, suffered with more than 50% of the inhabitants still living in slums. Families settled near train tracks because that area enabled them to be close to a mode of transportation. As a result, it is estimated that at least one child per day was killed by trains running through squatter settlements as close as feet to railroad tracks. In addition to the hazardous safety issues, there are also issues of disease and inadequate preventive services due to lack of FDI in health care services and sanitary facilities in these rural regions. For example, a survey done in Bombay found that Bombay needs 500,000 public restrooms, but It has only 200. The high prevalence and consequent high mortality due to the diseases is direct effect of the lack of sanitary facilities, leading to a spread of subpar sanitary conditions.

Therefore, Prime Minister Modi’s meetings with leaders from Japan, China, and the U.S. is crucial in addressing these issues because these superpower countries can help meet its developmental requirements in improving sectors such as energy, higher education, and improved infrastructure in rural areas, given India’s massive needs and lack of domestic capitals such as those necessary for equipment, educated and highly skilled labor, and advanced technology.

For example, FDI from the US can play a huge role in the realm of technology transfers, in particular, those of green technology, and also for higher education, which is Modi’s top domestic priority. In these areas, the U.S. does have strong comparative advantages that others might not possess. The U.S. government can also help by providing risk insurance or loan guarantees to U.S. companies which are making investments through institutions such as the Export-Imported Bank and Overseas Private Investment Corporation.

As for Japan, it can help achieve Modi’s dream of “smart cities”, for which no other country can be a better example than Japan. Kyoto is a remarkable example as it is the oldest city in Japan, yet also one of the smartest. Modi wishes to replicate this in rural areas like Varanasi.

As for China, even though India was not in good terms with China after war broke out between the two countries in 1962 over a border dispute, at the moment, China can make huge investments in infrastructure such as railways and telecommunications in rural areas, particularly in the context of promoting its recent One-Belt One-Road initiative.

As illustrated above, FDI has become increasingly important source of finance that can contribute to economic development in the developing world, particularly in India. In fact, for Indian economy which has tremendous potential but lacks necessary capital and technology, FDI can have a significantly positive impact.

Nevertheless, FDI may not be a panacea curing all the problems India is facing, in particular, regional disparities, given that FDI inflows tend to be directed to the regions already having good infrastructure, transport connectivity and quality human resources available.

In this sense, while PM Modi’s efforts to attract FDIs through meetings with Japan, China, and the U.S leaders are encouraging signs, attaining Modi’s goal of “development across all states” remains a tall order and requires the government to undertake its own prior homework. This includes improving investment climate in rural areas by constructing rural infrastructure and improving policy and regulatory environment in rural regions in order to induce more FDIs into the less developed regions of the country.

Unless this issue is not addressed, while FDI can certainly contribute to accelerating India’s economic growth, worsening regional disparity might greatly overshadow the positive impact of hard-won economic gains from FDI.