The Hindu Business Line : Gimmicks for foreign funds

IT HAS BEEN customary for chief ministers and finance ministers at the Centre, on assuming office, to make a strong pitch with foreign investors through `road-shows'. Viewed thus, the Finance Minister, Mr P. Chidambaram, has followed the script, in taking road-shows, first to New York and then to London. It remains to be seen if he will fare any better than those who preceded him in trying to attract investments. History is clearly against it. The fact is investors enthusiastically participate in such road-shows and, in an exercise of political correctness, even applaud the effort at marketing India as an attractive investment destination. But the graph of actual flows of investment over the years has shown no perceptible inflection.

If history is against it, the structural factors that militate against any dramatic improvement in inflows are no less so. Leading the list is the capacity of the Indian economy to absorb overseas money in productive sectors. Agriculture has traditionally attracted long-term capital of the kind that only the government or multilateral aid institutions seem capable of providing. In the traditional segments of manufacturing, there has been over the years fresh capacity creation in tune with the steadily rising local demand. Such capacities have been created with a combination of local and overseas capital that has come in the normal course. Overseas investors in such ventures have not needed road-shows involving the finance minister and senior government officials to refine their perception of risks and rewards of investing in India. Indeed, they have never needed one and are unlikely to do so. That leaves infrastructure investments in the services sector, which can potentially absorb chunks of foreign capital. A massive increase in infrastructure investment can, of course, unleash the latent growth impulses in other sectors. But given the policy imponderables in securing a reasonable return on investments, it would be unrealistic to expect overseas investors to play any significant role. For all the favourable image that China enjoys among the international investment community, it is an example of domestic resources, rather than foreign capital, contributing to the massive development of power, port and road infrastructure.

Then there is the mindset of the typical overseas investor to contend with. As a class, they are not averse to risk-taking, but when it comes to investing in the emerging markets, they have always looked to the state for an assured market, guaranteed prices and, even minimum return on their investments. But in a democratic polity, given the dynamic interplay of conflicting political forces, even the best guarantees can come unstuck, as the experience of Enron in the Dabhol power project has shown. It boils down, therefore, to the government holding out before these investors the allure of rich rewards of investing in a successful, performing Indian economy and the prospect of losing out on such an opportunity by a policy of continued vacillation. The Government can achieve this by putting in place an enabling policy environment that aids incumbent players exploit to the hilt existing investments rather than waste its energies on such road-shows.

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