For any country, capital is a major fuel for economic growth. India lacks capital for investment in many sectors including the infrastructure sector, which is crucial for attracting FDI. Capital flows into those countries where the investment climate is favorable for multinationals firms. Though India has been inviting FDI since the liberalization era, it is still unable to attract the required investment for the growth of the economy.
In the last decade, China demonstrated its power in attracting FDI and utilizing it for the growth of the nation. China's stupendous economic growth in the last decade is the result of the huge FDI inflows. China attracted FDI mainly into the export-oriented sectorsSEZs. Contrastingly, India attracted FDI mostly to cater to the needs of the domestic market rather than the export sector. Despite opening FDI cap in almost every sector, India has barely managed to attract $5 bn in the last fiscal year. On the other hand, China has not liberalized every sector and allows foreign investments only through joint ventures with local companies, yet it has attracted $500 bn FDI since the liberalization of its economy compared to India's $50 bn in the same period. Dr. Ashima Goyal, Professor of Economics, Indira Gandhi Institute for Development Research says, "China opened out to FDI 10 years before India did. FDI to China really took-off in the mid-1990s, and given that we are 10 years behind China, we should start seeing higher inflows now. Rather than comparing our inflows to those going to China today, we should compare our current levels to those that went to China 10 years earlier." China's success can be attributed to its investment attitude for providing employment and keeping the economy on the growth path. China has grown at an aggregate of 9% since the last decade. Investment levels are the highest at 35% of the GDP, whereas India's investment levels are still about 22% of the GDP. Many experts opine that China is over stating the FDI figures and that round tripping (investments from main land going to Hong Kong and coming back as the FDI) constitutes 50% of the FDI flows into China. Even after including the $8 bn FII flows and the reinvested earnings in the Indian FDI figures, India stands nowhere in comparison with China.
The Chinese diaspora has helped in attracting FDI inflows from Hong Kong and Taiwan. Non resident Chinese are contributing 70% of FDI inflows into China. On the other hand, India have failed to attract the NRI community to invest in India due to their risk averse nature and desire to invest their money wherever they get high interest rates. Professor S Mani Kutty, Business Policy Area, IIM Ahmedabad says, "This huge difference in attracting FDI between India and China means we are not able to attract from our own NRIs, and India is still not all that great as an investment destination." The Chinese success could be attributed to investments in the export-oriented sectors. Investments have flown mainly in labor-intensive industries such as textiles and toys. FDI has increased the productivity in Chinese labor and capital productivity across the industries. Besides the productivity issues, the government's fiscal incentives such as tax incentives and lower duties coupled with the huge domestic economy has resulted in low-cost products. As a result of its cheap production facilities, China has become the world's manufacturing destination. Consumption of the `Made in China' products in western economies has increased by significant levels in the last two decades. In these two decades, India has not made any solid attempts to attract investments in the exports sectors. India thus missed out on the manufacturing boom in the 1980s and 1990s to China.
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