Are we too reliant on FDI?

Wed, 25 Aug Pre-Open

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This is one point that every analysis and prediction on India banters about. The poor state of India's infrastructure. See, infrastructure is not a hurdle for emerging economies alone. The developed economies are also struggling to meet their infrastructure needs. Only that their needs are different. The developing economies need better roads, bridges, more power and water supply. The developed ones need to rebuild a substantial part of existing infrastructures that were built way back in the 1960s and 1970s. These have now reached a point of their life cycle where renewal and replacement is imperative.

Amongst emerging economies, the buck stops at China when it comes to infrastructure investments. The other BRIC nations fall way behind. Since the year 1998 China has done an impressive job of investing in the country's infrastructure. In fact it has invested as much as 20% of its GDP on building roads, ports, buildings and bridges over the past few years.

India's case for low infrastructure investment has been rested due to lack of funding. Foreign long term investment (in the form of FDI) has been hard to come by. And the government has been extremely lax in the execution of the 5-year plans so far. Hence most projects have been left at the mercy of limited bank funding. Infrastructure funding institutions do not yet have a very long history in India and are yet to achieve scale.

The funding of China's infrastructure projects however paints a very different picture. The projects have received the support of provincial and local governments, state development banks in the initial years. The share of FDI in Chinese infrastructure investment went up from 3% in 1981 to as much as 115 in 1995. But the same has been tapering off progressively since then.

Data source: RBI *Self funding includes internal accruals and funds raised on their own by private companies in China.

As against popular notion, China is no more dependent on FDI for its buildings and bridges. On the contrary, infrastructure projects in China are funded predominantly from the domestic sources. In most cases private companies have been using their internal accruals or raising funds on their own through domestic sources or international alliances.

Institutions like the World Bank and the Asian Development Bank (ADB) have also been large contributors to China's infrastructure. But so have they been in India. Nevertheless, the difference seems to lie in self-reliance. With the kind of clout many Indian companies are enjoying in the global market place these days, it will not be a bad idea to use some of it for our infrastructure needs as well.