Why India Is a Popular Source of Foreign Investment 'Data Analysis' chapter

  • Length: 5 pages
  • Subject: History - Asian
  • Type: 'Data Analysis' chapter
  • Paper: #83174020

Excerpt from 'Data Analysis' chapter :

respect to macroeconomic variables, was India an attractive site for foreign direct investment in 2012?

India has become one of the most attractive prospects for long-term economic foreign investment. According to Ernst & Young, despite an overall softening economy during the 2011-2012 economic period: "India remained very attractive for FDI in 2011. FDI projects increased by 20% in India in 2011, attracting 932 projects, which created an estimated 255,416 jobs" (Ready for the transition, Ernst & Young: 4). In fact, the economic uncertainty may have actually worked in India's favor. India is widely regarded as a place which has a technologically astute, highly trained workforce. Labor costs are low, the government is open to foreign investment in terms of its legal infrastructure, and the workforce is culturally attenuated to the attitudes of the West. The fact that English is the language that unites India is another bonus factor. "Investors came to India to find growth opportunities for their business and the possibility to operate at lower cost…India's massive and growing domestic market" was said to be the main draw in a survey of investors and 45% of respondents said that they "see India as a highly cost-competitive location" (Ready for the transition, Ernst & Young: 4).

India's main competitor is clearly China but China does not have the advantages of an English-speaking populace. Also, it has incurred negative publicity in regards to a number of safety scandals regarding products manufactured there, including toys and dog food. India has fostered a great degree of confidence in its investors: 29% percent of investors stated they still believe India would continue its rapid growth into the new millennia and "see India as one of the world's leading destinations for shared service centers (27%) and manufacturing (25%)" (Ready for the transition, Ernst & Young: 4).

However, possible objections remain: first of all, one of the aspects of Indian culture that hampered it for many years was its strong sense of traditionalism and its caste system. Despite all of its recent innovation, the Indian government and legal system has been taken to task for being insufficiently objective and modern its outlook -- corruption remains rife. "At least 42% of young Indians have paid a bribe, according to a 2012 Hindustan survey" to do business (Xu 1). Of course, this is not to discount the profound changes that India has made to improve its infrastructure. Infrastructure improvement is a critical factor for sustained economic development and attracting foreign direct investment (FDI). "If we ask a simple question such as, 'Why are some economies rich and others poor?' we get a simple answer: Rich economies have greater resources per capita -- more capital, both human and nonhuman, and better technology connecting the two. But this answer only begs another question: 'Why do some economies have high levels of capital and technology, while others do not?'" (Jordan 1). India has been building its resources -- both its physical resources but also more critically its human resources. Access to technologically sophisticated education has expanded and there has also been a revitalization of entrepreneurship in the nation.

India's government, although not without its regulatory problems, has also pursued fiscally sound policies to quell investor fears. Because of concerns about rising inflation and unemployment, "the Reserve Bank of India (RBI) is undertaking a policy to drain excess liquidity from the financial system and has raised interest rates by over 350 basis points since the beginning of January 2010 to curb rising inflation. In December 2011, inflation fell below 9% for the first time in the last 12 months" (Ready for the transition, Ernst & Young: 4). One of the risks of a sharp increase in growth is a corresponding increase in inflation and combined with high unemployment, the results can be deadly for a fragile, developing economy. The RBI has thus taken aggressive measures to ensure that India's economic improvement is not a mere anomaly, but builds upon its current success.

The government of India is also mindful of the fact that there are critical deficits in the infrastructure that need to be rectified. "Development in the country's infrastructure is poised to accelerate as the Government of India (GOI) plans to double its infrastructure spending from U.S.$500 billion to U.S.$1 trillion during FY2012 -- 17. The GOI is aggressively focusing on minimizing India's infrastructure deficit and would like to generate investor interest in the sector" (Ready for the transition, Ernst & Young: 16). So long as the deficit is acknowledged and is being addressed, India clearly hopes this will quell any concerns that intrinsic components of the Indian infrastructure will limit development.

Another attraction of the emerging Indian market is its expanding population of consumers. Given that more residents are finally able to purchase middle-class comforts, there has been a sudden influx of interest in conspicuous consumption and a rise of a leisure class. The "growing urban Indian population has been driving organized retail in India. In addition, shift in the preference for branded products; convenient spending through debit/credit cards; and greater propensity to spend act as drivers for the sector" (Ready for the transition, Ernst & Young: 20). American companies such as Starbucks have gained increased traction in the Indian market where before American companies that sold even affordable luxuries struggled: changes in the average take-home salary of the average Indian has caused shifts in traditional behaviors -- people are now going out to eat more, buying more cars, and engaging in other aspects of Westernized spending culture.

Although India clearly wants and needs to develop different facets of its economy, there can be no doubt that IT was the driving engine of the current boom. "The technology sector in India has a major impact on the Indian economy. The industry has grown from U.S.$4 billion in 1998 to more than U.S.$80 billion in 2011, employing directly and indirectly more than 10 million people" (Ready for the transition, Ernst & Young: 22). The best and brightest Indians are determined not to be left behind and the most in-demand slots for university education are in India's renowned technical institutions.

But although there is great concern about the ethnic divide between Pakistan and India, an even more important issue might be the widening of the disparity in lifestyle between the haves and have-nots. Not everyone has profited from the Indian economic boom and the chasm between economic sectors has grown rather than narrowed, despite the dissolution of so many old ideas about caste. Alice Rivlin observed regarding American prosperity: "Although more people have jobs than even before, and wages and average family incomes are creeping up, millions of Americans feel left out of the good times and injured or threatened by the changes that are bringing them about. Many communities, especially inner city neighborhoods, older suburbs and areas of rural poverty, are being left behind and feel increasingly isolated from places of rising affluence" (Rivlin 1). The same is even truer of the rapid growth in India, which has still left many ordinary Indians behind. Discontent between reality and expectations can lead to social unrest.

A good example of this can be seen in India's healthcare sector, which manifests a curious paradox. On one hand, India's pharmaceutical industry is highly successful and many of its companies are revered around the world. Yet healthcare for ordinary Indians remains sorely lacking. "India has a disease burden…around 37% higher when compared to Brazil and 86% higher when compared to China. Despite higher disease burden, India has deficit of health infrastructure as highlighted by number of hospital beds per thousand populations (0.9 beds per 1000 population), which is less than half of Brazil and China (2.60 and 2.20 beds per 1000 population respectively)" (Ready for the transition, Ernst & Young: 26).

While the Indian…

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