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26 August 2011, Gateway House

FDI brings economic growth – its risks bring hiccups, not heart-attacks

The economic turmoil in Europe and the U.S. has affected financial markets globally. India too witnessed a fall in its stock market and investments have slowed. Gateway House’s Samyukta Lakshamn speaks to S.P.Kothari (Massachusetts Institute of Technology), about the challenges that lie ahead for India.

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S P Kothari, Deputy Dean and the Gordon Y Billard Professor of Management at the Massachusetts Institute of Technology (MIT), discusses the global financial crisis, India’s slow reforms and the challenges for the economy with Gateway House’s Samyukta Lakshman.

1. India perceives itself as immune to the global financial crisis. But that is because its economy is far less globally integrated. What impact will the current turmoil actually have on the Indian economy and business?

India, like any other country, is integrated with the global economy; the real issue is the extent to which it is integrated. India will be impacted because exports constitute a non-trivial source of employment and income. What we are witnessing –the stock markets moving up and down – has to do with what’s going on in the US. Clearly, the economic growth in the U.S. and Western Europe has slowed down, so has their expenditure on information technology, desire for tourism and so forth. Any other sector where India plays a role will impact the country adversely.

2. How can India strengthen regulatory institutions and regulations?

India should have fewer regulations and should open up the economy far more. If you have good enforcement then you don’t need as many laws. I think India is a highly regulated economy, far more than the Western economies. Those handcuffs must be loosened and the economy opened up for more investment from abroad. It needs less government involvement in sectors like aviation, coal, railways and power. It needs to disengage the manufacturing and industrial sectors, and place them in the hands of the private sector including private ownership. I think the forces that favour such privatisation are still rather weak in India – and in much of the emerging markets. I don’t foresee a change in the next five to ten years.

3. Foreign Direct Investment (FDI) is fleeing India; corruption is in the international headlines and keeping foreign investors at bay. What stage of development is India at, and where does India stand in terms of risk? Can you draw comparisons with other countries?

India is a much bigger country than most nations. The aggregate dollar amount of FDI may seem substantial, but from a per capita basis, if FDI is $20 billion in India then that is like $20 per person. There are many countries around the world where FDI on a per capita basis is far greater –Mexico is 10 times greater than India, so are Bulgaria and the Czech Republic. It is important that India creates an environment that is conducive to attracting a lot of FDI. It hasn’t done that yet. China is the base comparison; FDI in China has been much higher than in India.

The corruption scandals discouraged foreign investors, but not nearly as much as the overall law enforcement, regulations, the number of clearances one needs to get to start a business. More damaging has been the kind of mass protests against visible foreign investment. What comes to mind is the investment Tata Motors made in Singur, or Posco’s investment in Orissa. Those high-profile projects were delayed if not all together scrapped as a result of grassroots protests.

4. What measures can India take to liberalize while minimizing global systemic risk? Will the pressure for financial liberalization lessen? If so, for how long?

I think we would be exposed to foreign systemic risks with or without FDI. There are countries in Africa that are immune to global systemic risks, but that has made them exceedingly poor. You would be immune to globalisation risks, but then you would not benefit from all the good that comes from globalisation. FDI will bring economic growth. From time to time there will be risks, but they will be hiccups, not heart attacks.

S P Kothari is Deputy Dean and the Gordon Y Billard Professor of Management at the Massachusetts Institute of Technology (MIT).

This interview was exclusively conducted for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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