India and foreign investment

• India’s  national monument, in New Delhi, is a tall, broad gate. That is ironic, for the country is hard for foreigners to enter, whether they be individuals trying to get a visa or businesses trying to invest.
• India’s inaccessibility is unfortunate because, to bridge the gap between its weak domestic saving and its high investment needs, it must import capital, especially foreign direct investment (FDI), the least flighty kind. Yet the latest figures are going in the wrong direction. Last year India got just $24 billion in FDI, down by almost a third on 2009. Globally, FDI was flat over the period.
• There are many reasons why foreign companies are put off India, from corruption and bureaucracy to the difficulty of obtaining land. These are problems that must be fixed for the sake of local, as well as international, businesses. But in too many areas foreign firms remain barred from entering the country altogether—railways and legal services, for instance—or are restricted to minority stakes—such as insurance and domestic airlines.
• Indian officialdom realises this must change and, at the pace of a Himalayan glacier, has been opening up. From this month, for instance, foreign firms are allowed into a wider range of agricultural businesses. But many other such reforms are stuck. Given the huge benefits that liberalisation could bring to India’s 1.2 billion people, the government should pluck up courage and fling wide the gates.
• India’s primitive and wasteful retail industry is the most glaring example of the need for foreign investment. The business is dominated by tiny mom-and-pop stores. The near-absence of big supermarket chains means there is no “chill chain” of transport and storage to keep fruit and vegetables fresh from field to shopping-basket. As a result, a quarter or more of such produce is wasted, a catastrophe in a country where so many go hungry. In more advanced retailing systems, less than a tenth is lost. Some big Indian firms are moving into the business, but what is needed is to lift the remaining restrictions on foreign ownership and let in international experts such as Walmart, Tesco and Carrefour.
• Retailing employs more than 30m Indians, so some fear social unrest if the admission of foreign chains puts small shops out of business. But given India’s rapid growth there is plenty of space for supermarkets to expand without killing small stores. Indeed, the tiddlers would be better off buying their supplies from foreign supermarkets than from the inefficient, costly middlemen they rely on now. In any case, such worries are greatly outweighed by the potential benefits to Indian consumers: lower prices and better quality, choice and nutrition. Economists in America talk about the beneficial “Walmart effect” that the ubiquitous cheap chain has had on curbing prices. Indians, as they fret over soaring food costs, might find such a thing a godsend.
• Given the success some Indian companies are now having on the world stage, India’s fear of foreign competition at home seems odd. It is time for the country’s politicians to sweep away such protectionism for good, and declare that India is as ready to take on the world in business as its World Cup-winning team is in cricket.

economic and financial indicators:overview

• Corruption is dreadful in India, as shown by a current “season of scams”—over mobile-phone licences, the Commonwealth games and more. Politicians, notably the ruling Congress party, are now feeling the public’s ire. Worries have also grown that graft is scaring away foreign businesses.
• Circumstantial evidence points that way. A spokesman for a big Western firm mutters into his cappuccino about a recent High Court decision, which if upheld would cost his company billions. It was so strange, he says, it could be explained only by judicial graft. A representative of a British media firm, SIS Live, which broadcast the Commonwealth games from Delhi, in October, is furious—along with other contractors—at being left millions of pounds out of pocket because, he says, payments have been frozen by investigators digging up evidence of corruption at the event.
• Across the board, surveys regularly tell how graft is an unusually heavy tax on Indian business. An annual one published on March 23rd by PERC, a Shanghai-based consultancy, shows investors are more negative than they were five years ago. Of 16 mostly Asian countries assessed, India now ranks the fourth-most-corrupt, in the eyes of 1,725 businessmen questioned. Being considered worse than China or Vietnam is bad enough; being lumped with the likes of Cambodia looks embarrassing.
• Outsiders may get an exaggerated view. India’s democracy, with a nosy press and opposition, helps to trumpet its scams and scandals, more than happens in, say, China. Yet locals tell similar tales. A cabinet minister frets that there is so much ghotala(fiddling), “it tells the world we are all corrupt. It may be a dampener to investment.” Others agree. KPMG this month reported on 100 bosses who were asked about their own experience of graft. One in three said it did deter long-term investment.
• Judging how much difference it makes is tricky. Right now, investors may be spooked as much by the fight against graft as by the corruption itself. Arpinder Singh of Ernst & Young in Mumbai says foreigners, especially those with some connection to America, increasingly hire firms like his to help them comply with America’s Foreign Corrupt Practices Act. Once a foreigner holds more than about 5-10% equity in an Indian firm, it is seen as having some responsibility for how it is run.
• Now even Indian firms, if they want to raise money abroad, or if their bosses want to protect their own professional reputations, are doing the same. As other countries, such as Britain, bring in tough anti-graft laws like America’s, the trend will continue. Yet many Indian firms still fail to comply with higher standards, so deals falter. Mr Singh ticks off a list, “in infrastructure, ports, toll roads, irrigation, microfinance”, of deals he has worked on that collapsed over “governance problems”.
• None of this is enough to prove that graft, alone, is scaring off business. Pranab Mukherjee, the finance minister, insists there is no correlation between corruption and foreign direct investment (FDI). Jeffrey Immelt, the boss of GE, in Delhi last week, cheerily agreed, insisting that a fast-growing market trumps all other concerns.
• But something is keeping investors wary. In 2010 the country drew just $24 billion in FDI, down by nearly a third on the year before, and barely a quarter of China’s tally. There is no shortage of other discouragements: high inflation, bureaucracy, disputes over land ownership, and limits on foreign ownership in some industries.
• Even so, India is home to an unusually pernicious form of corruption, argues Jahangir Aziz of JPMorgan. Elsewhere graft may be a fairly efficient way to do business: investors who pay bribes in China may at least be confident of what they will get in return. In India, however, too many crooked officials demand cash but fail to deliver their side of the bargain. Uncertainty, not just the cost of the “graft tax”, may be the biggest deterrent of all.