30 January 2004, PTI

GENEVA, JAN 30: Notwithstanding the euphoria over rising foreign exchange reserves, at present over 100 billion dollars, it was today cautioned here that higher FDI (foreign direct investment) inflows do not necessarily result in higher economic growth and development.

In a comprehensive report released here as part of an UNCTAD conclave by India-based think-tank and NGO Consumer Unity and Trust Society (CUTS), developing countries have been asked to rethink their national development strategies and re-orient or restructure FDI strategies to facilitate “quality FDI”.

Our IFD (Investment for Development) project shows that not all of the developing countries have been successful in facilitating higher FDI, growth and development through liberal investment policies”, CUTS Chief, Pradeep S Mehta said here.

He said countries need to re-orient their development plans to take into account changing international economic factors like growth of new kinds of FDI, effect of technological change on the information, communication and technology sector and growth of global production networks.

The report, “Strategising Investment for Development”, prepared in association with UNCTAD points towards the low fructification rate of approved FDI. In India, only about 20 per cent of FDI approvals translate into actual investment.

Analysis of determinants of FDI in India shows that there is a relationship between the rate of fructification and the size of the firm. The probability of contract failure declines with a decline in size, but large firms might reduce FDI fructification rate, it said.

Mehta said India received lower FDI as a percentage of GDP than some other developing countries of similar size like China and Brazil. “While policy changes and regulatory clarity can lead to higher FDI inflows into India especially through the privatisation route, policies to enhance growth are also critical”, he added.

In another report, also released during the conclave, “Synergising Investment with Development”, CUTS said there is really no case for the contention that FDI, per se, can solve the problem of investment though FDI shares of least developed countries (LDCs), as a whole, have gone up in the previous decade.

The report which also covered countries like Bangladesh, Brazil, Hungary, South Africa, Tanzania and Zambia said most importantly, the fluctuations in private capital flows need to be recognised. Countries with smaller volumes of FDI have experienced larger fluctuations in FDI inflows.

In many of the project countries, fiscal stability seemed to have been achieved at the expense of compressing public expenditure, at a time when public services are either deteriorating or not rowing rapidly enough.

The “Strategising” report said one of the reasons for the low fructification rate of FDI in India is bureaucratic hassles and red tape though the procedural route has been simplified and made non-discriminatory in the last decade.

It said as per investors’ feedback, environmental clearances and legal work in the country are the most time consuming. There are three stages of a project approval, general approval, clearance and implementation. It was the second which the investors found the most oppressive.