MUMBAI/BEIJING: India is catching the eye of more foreign firms as an investment destination, but any expectation that it may soon become the new China as manufacturer to the world is not borne out by the money flows. India wants to attract capital to emulate China and build up manufacturing as a mass employer for its millions of rural poor, but in 2005/06 it received a net $5.7bn in foreign direct investment (FDI), less than a tenth of China's $60.3bn. Morgan Stanley sees India's FDI rising to $10bn, or 1% of GDP, by 2008, with the flows mostly targeting low-capital services and manufacturing for the domestic market, rather than factories for exports like many in China.

"It's a completely independent trend. It's not that you have a dollar to invest and, instead of China, you invest in India. China continues to take its fair share for the businesses it is known for," said Chetan Ahya, economist at Morgan Stanley in Mumbai. "India continues to be an FDI destination from a domestic demand perspective rather than FDI for manufacturing outsourcing. The FDI for outsourcing which happens in India is in services, which are not very capital intensive." China's phenomenal pull for foreign money is a source of envy in India, where the government wants help for an estimated $350bn worth of projects to build an efficient road network, expand ports and address a woeful power deficit. "Part of the reason India hasn't attracted so much investment in manufacturing is the infrastructure is poor," said Robert Prior-Wandesforde, an economist at HSBC in Singapore.

"It's a bit of a vicious circle." Michael J. Cannon-Brookes, vice president of business development for China and India at IBM agrees."In manufacturing you need infrastructure to run your plants, get your goods to market and bring in supplies. That's clearly a strong selling point for China," he told Reuters in Beijing. "India has infrastructure challenges, to put it mildly." India also can be slow to approve projects.South Korean steel giant POSCO signed a deal in June 2005 to set up a $12bn plant in the eastern state of Orissa, but has faced criticism over the displacement of villagers. India is creating special economic zones to attract export-oriented businesses. But while it has approved more than 200 projects, the zones have stirred up controversy over land acquisition and revenue losses from tax breaks. Politically too, India's attitude is ambivalent. While reformers at the top of government want to open doors to outside firms, their communist allies oppose giving foreigners more access to areas like retailing, where global giants such as Wal-Mart Stores are keen to invest.

Nor is China perfect.

Merrill Lynch said in a research report this week that concerns were building about excess capacity in areas like power, cement, property and some heavy industries. Business executives say regulations can be hazy or conflicting at different layers of local and central government. While it could take years to iron out these conflicts and give businesses the transparency and rule-based predictability they crave, investors say the environment is broadly improving.
"The trend in China towards respecting intellectual property and transparency is increasing," said one British business executive. One advantage that India has over China is that it uses capital more efficiently, according to Merrill Lynch. "To produce an additional dollar of output, we estimate that China needs to invest $3.50. India only needs to invest $2.50," it said. Furthermore, growing domestic consumption is prompting some firms that had Indian research or call centre bases to move into manufacturing for the local as well as export markets. Top handset maker Nokia opened a factory in March, while Dell, the world's biggest personal computer maker, is spending $30mn to set up manufacturing operations in the south. – Reuters