Chasing the dragon: Accounting for the under-performance of India by comparison with China in attracting foreign direct investment

This paper compares and contrasts the performance of India and China in attracting foreign direct investment (FDI). Both economies are large emerging markets that had rather similar profiles in 1978. Today, China ranks number one as the world’s preferred foreign investment destination. Closer examination of the FDI statistics suggests that India’s performance has been significantly understated while China’s performance continues to be overstated. However India still lags for a number of reasons. These include a high tariff regime, poor infrastructure (power, ports, roads and railways), a regulatory system that is too often not business-friendly, a policy of reservation of many potentially export-oriented sectors for small businesses and inflexible labour laws. The government’s large budget deficit is preventing investment in necessary physical infrastructure yet India needs to increase the rate of private investment to enhance the economic growth rate and reduce poverty. The paper concludes that based on China’s experience of promoting FDI, further economic devolution to state level is the best way forward. While this is likely to exacerbate inter-state income inequality in the short term, it does offer the possibility of redistribution in the longer term. [DSA, Annual conference 2003: Globalisation and Development]