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For the first time in history, a record number of Indians are investing abroad rather than in their own country, comments Uday Sharma
Poverty is an obvious reality in India with income inequalities and 2006 marked a point when decades after independence, Indians have started to invest more overseas than within the country, which is gaining from Foreign Direct Investment (FDI). With foreign currency reserves exceeding US$160 billion and with a pro-liberalization federal government relaxing norms for Indian firms acquiring hard currency for investments abroad, the quantum of money expected to be invested by local corporate bodies outside India is expected to exceed US$8 billion during 2007. Also, for the first time in its independent history, the economy has grown by an average of 8% a year four years in a row, making it one of the fastest in the world. However, this growth has not been even nor has it been inclusive. Whereas manufacturing industry and the services sector have been annually expanding at 10% or faster, agriculture has grown by a niggardly 1.5-2% a year in the recent past. In addition, economic growth has not been accompanied by a reduction in inequality or a reduction in regional imbalances. One of the most positive features of the economy is the annual growth rate of GDP that has been maintained at 8% because without growth, the problems of poverty and inequality can never be tackled effectively. At least one out of four people in India live below the poverty line of one U.S. dollar/day.
The disturbing part of India's growth story is the widening regional imbalances. "Much of the northern and eastern India have been lagging behind the west and the south and this could cause serious social and political problems," according to a Professor at Jawaharlal Nehru University.
Other economic analysts see both positive and negative aspects to the fact that Indian firms are investing more overseas than ever before.
At one level, the competitive abilities of local entrepreneurs are being recognized internationally. For instance, local liquor baron Vijay Mallya has ambitions of controlling 10% of the world's alcohol business. "Indian entrepreneurs today have global strategies to choose optimal manufacturing locations in order to cut costs and assimilate technologies," says Subir Gokarn, executive director and chief economist, Crisil Limited. A ‘negative’ aspect is that Indian companies are going abroad despite the fact that there is no dearth of investment opportunities within the country. "The problems here relate to infrastructural constraints and restrictive labour laws and job security regulations," he said. ‘Business Standard’ newspaper, points out that "despite the apparently insatiable hunger for investments in India, the government has failed to put in place non-discretionary, transparent mechanisms for channeling these investments". The federal government's opaque policies were apparent from the absence of clarity relating to norms for acquiring agricultural land for setting up industrial units, especially those located in special economic zones (or export-oriented localities where industrial ventures receive tax concessions) as well as regulations for inviting foreign investment in retail concerns. Over the coming decade or so, India needs to invest at least US$150 billion for improving its infrastructure and a similar amount on retail ventures if the economy is to continue to grow at 8%. We have been talking about railway freight corridors connecting metropolitan cities, mega power plants, six-lane highways and modern airports, but we have a long way to go before these projects are properly implemented. Gokarn says that "during 2006, a perception has been clearly established that no major foreign investor can afford not to be in India". At the same time, he contends, investment flows from foreign as well as Indian firms would have gone up considerably if India's electricity shortages came down, if power utilities worked more efficiently and if the overall quality of public services improved. "Not surprisingly, many Indian companies prefer to buy into companies outside the country," he says. Some 60% of world trade is intra-firm trade and one way Indian companies are ensuring that their exports grow is to acquire firms abroad. "Through mergers and acquisitions, exporters ensure access to distribution channels as well as the latest technologies," he points out, adding that this explains why Indian companies in industries such as steel, automotive components, pharmaceuticals and information technology, are expanding abroad. It would be erroneous to look at India having become a net exporter of capital. One should keep in mind that in addition to foreign direct investment, close to US$9 billion are expected to come into India during 2006 in the form of portfolio investments in stocks and shares by foreign institutional investors. 
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