The Hindustan Times: The PM must walk the talk on FDI

The PM must walk the talk on FDI
Rod Hunter 
The Hindustan Times
September 18, 2014

In Prime Minister Narendra Modi’s Independence Day speech, he called on international businesses to deepen their investment in India. He’s right to focus on foreign direct investment (FDI), but fundamental to India’s ability to attract more capital will be overhauling public policies that have made the country inhospitable to investment from foreign firms.

Modi’s plans build on a model of development with a record of success: Modernise infrastructure and open up to FDI. South Korea pioneered this approach. Its exemplary record of economic growth — averaging 7% annual growth over the past 50 years — was a by-product of welcoming foreign investment, protecting property rights, and integrating with the global economy.

China has pursued a similar model on a grander scale. Like South Korea, China has provided workable infrastructure, a skilled workforce, and relatively secure property rights for investors.

India should be able to replicate this progress. Given its large supply of well-educated, English-speaking workforce, relatively low labour costs, and large potential domestic market, the country is well-positioned to attract FDI. But, in addition to inadequate infrastructure, a thicket of regulatory and legal obstacles has scared off investment. From 2010 to 2012, the country’s stock of FDI totalled just 12% of GDP, while the developing country average was 30%. India attracts only 2.7% of a total $1.62 trillion in global R&D spending; China attracts 17.5%.

If Modi is serious about attracting more investment to the knowledge-intensive industries (such as the biopharmaceutical sector), his government will need to tackle three obstacles.

The first obstacle is intellectual property (IP) rights. India has been hostile to IP protection, especially for biopharmaceuticals. In recent years, India has invalidated or otherwise attacked patents on a significant portion of innovative drugs available in India in order to make way for local champions. These attacks have been implemented through ‘compulsory licences’ and state approvals of copies of patented drugs. India should clarify that compulsory licences will be confined to genuine public health emergencies (as prescribed by international agreements), and reform drug approval procedures.

The second obstacle is the regulatory system. There is an unpredictable regulatory environment for clinical trials and drug approvals. India should streamline those measures, simplify administrative procedures for review of drug approval applications, and harmonise drug review standards with international standards.

The third area is the broader healthcare system. The government’s spending on healthcare is among the lowest in the world — $55 per capita, which is less than its BRICS peers. Within this limited budget, India devotes less than 1% of its GDP to medicines and collects more in tariffs and taxes on medicines than it spends on medicines. India can increase public spending on healthcare and create  a framework for expansion of private health insurance.

It’s encouraging that as Modi is speaking out on the importance of attracting FDI. But translating rhetoric into reality will depend on overcoming inertia and confronting vested interests that are committed to the status quo. If he succeeds, India will benefit from more investment, more economic opportunity, and greater prosperity for millions of people.