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Two ways to cook the
books
By Priyanka Bhardwaj
NEW DELHI - Most observers of the Indian
and Chinese economies have looked at foreign
direct investment (FDI) figures as defined by the
respective countries without looking at the
underlying accounting frameworks that make FDI
into China seem much more than India's. A debate
has now been stirred in India, with influential
sections of the government and business urging a
change in accounting procedures.
Given
India's narrow definition of FDI, the inflow stood
at US$5.6 billion in 2003-4, compared to China's
$60 billion. But amending the accounting framework
to make it in sync with international norms would
increase India's FDI figure to $50 billion -
substantially bridging the gap with China. This is
because India considers only equity capital as
FDI. The International Monetary Fund (IMF) counts
portfolio investments in excess of 10% as FDI as
well. Defined in Chinese terms - which complies
with international standards - Indian FDI would
thus have to include the $10 billion foreign
institutional investment this fiscal year, as well
as remittances that are likely to cross $20
billion. Adding up a couple more miscellaneous
items not considered currently, Indian FDI in
Chinese terms would easily cross $50 billion.
World Bank reports have estimated that
almost 50% of China's foreign investment could be
domestic cash, which, by way of a novel investment
method called "round-tripping", is channeled from
mainland China to Hong Kong or Macau to be
ploughed back in as foreign investment in order to
avail the tax incentives. The IMF definition of
FDI includes 12 elements - equity capital,
reinvested earnings of foreign firms,
inter-company debt transactions, short-term and
long-term loans, financial leasing, trade credits,
grants, bonds, non-cash acquisition of equity,
investments by foreign venture capital investors,
earnings of indirectly held foreign enterprises,
control premia and non-competition fees. China
uses all of these in its FDI figures. But since
2000-01, FDI statistics in India have also
included re-invested earnings. China even includes
imported equipment in its FDI figures, but India
uses this in its trade data.
Various
industry bodies in India have been pushing for a
change in the accounting framework for quite some
time, arguing that it will portray a healthy
picture of the Indian economy to potential foreign
investors. FDI is considered a major image
contributor. "We need to compare apples with
apples. There is no harm if we calculate our FDI
inflows the same way as China does," Amit Mitra,
secretary general of industry body FICCI
(Federation of Indian Chambers of Commerce and
Industry), has been quoted as telling the media.
"On the definition of FDI, we welcome the move to
make it more contemporary," Ajay Khanna, chief
executive officer of India Brand Equity
Foundation, has said. There have been efforts
within the government, too, to bring about a
change in the accounting system. Former deputy
governor of the Reserve Bank of India, Rakesh
Mohan, who is part of P Chadambaram's finance
ministry, has long been pushing for a change.
Of course, even if the FDI gap is bridged,
India will still have a long way to go vis-a-vis
China. The Middle Kingdom is way ahead in most
economic parameters: its per capita income is over
$1,000 per annum, double India's; about 3% of its
population is below the poverty line, against
India's 26%; its infant mortality rate is 26 per
thousand and life expectancy is 72 years; the
corresponding figures in India are 58 per thousand
and 64 years. China also ranks 96 in the human
development index, 32 notches ahead of India.
Indeed, India's democratic framework means
that all major development decisions have to bear
the stamp of a political consensus, unlike China's
dictatorial approach to reforms. But despite the
differences in the political structures and levels
of economic progress, the two Asian giants have
found synergies in trade that has witnessed
exponential growth in the past few years. China
has overtaken the United Arab Emirates to become
India's second-largest trading partner (after the
US) and if growth remains at current levels,
India-China trade could cross $17 billion by the
end of 2004-05. Observers say China is poised to
emerge as India's largest trading partner in two
to three years, with conservative estimates of a
potential $30 billion bilateral trade by 2010.
Describing India and China as the "twin
engines of growth" of Asia, Indian Commerce and
Industry Minister Kamal Nath recently said there
were several complementary aspects in the two
economies that could be tapped on to achieve a
fast growth in economic ties. "India-China two-way
trade now stands at $1 billion a month, compared
to $1 billion a year a decade ago. This 12-fold
increase in the last decade only goes to prove
that though we are competitors in many respects,
we also complement each other," said Nath at a
World Economic Forum meeting, adding that the
complementary aspects that could be probed
included software, where India has a comparative
advantage, and information technology hardware,
where China leads.
Priyanka
Bhardwaj is a New Delhi-based writer
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