OPEN FOR BUSINESS

Global Finance, Sep 2004 by Chaze, Aaron

These measures will be crucial for building GDP, but the government also has to drive forward other projects, such as building new highways linking the major urban centers and creating other physical infrastructure such as ports and airports, as well as increasing public spending on healthcare and education. Some other recommendations being made to the government involve increasing the flow of credit to the small and medium-size enterprise (SME) sector and providing stable electricity at a lower cost to industries, thus leading to larger investment demand. The investment rate in India stands at around 20%-lower than the savings rate of 24%. According to the Planning Commission (which designs, implements and monitors five-year public investment plans), India needs a 28% investment to GDP ratio in order to sustain growth rates at 8% per annum, so there is a substantial investment gap that needs to be filled.

This is the minimum requirement for creating the environment for sustainable GDP growth and creating the right climate for domestic and foreign investment. The government also needs to ensure that people have the necessary spending power. Rural public works projects, major infrastructure projects, a stable tax regime and steadily increasing urban and rural incomes are providing the base for increasing consumer demand, which is a trigger for investment demand. "This year may not be great thanks to the drought, but if investors have a three- to five-year perspective, then things look good," says Vyas.

Labor Reforms Itself

One common argument put forward as a stumbling block to foreign investment is the lack of labor reform, leading to lower foreign investor confidence. This could be a source of worry, considering that the biggest driver of FDl in India is labor outsourcing, whether it is in software services, auto components or textiles. But lack of labor reform or government willingness to consider allowing corporations the leeway to introduce a hire and fire policy is increasingly proving to be a non-issue. The reality is that Indian labor has proven itself to be very flexible. This fact has been demonstrated by events over the past few years. "Labor reform is not a problem, and the statistics prove it. There have been enough recent voluntary retirement schemes in Indian industry to indicate labor flexibility," says Vyas.

Numerous examples of very large and successful voluntary retirement schemes abound both in corporate India as well as in the government sector. Over the past couple of years Tata Steel, the country's largest private sector steel producer, reduced its workforce by more than 35%, from 78,000 to 50,000, while State Bank of India, India's largest bank, reduced its workforce by 10%, or 23,500 employees, for example.

The worries for FDI investors in reality are not so many, since most global corporations are looking for specific skills or niches within which they can operate. The story for portfolio investors is different because they have a shorter time frame so they will be more concerned about short-term changes. Softer issues such as law and order play an important part in increasing confidence levels of all investors both foreign and domestic and irrespective of their investment holding time frame.