India, the second fastest growing economy in the world, reached an important milestone in its history earlier this yearof 2005, and this remarkable achievement almost went unnoticed, due to poor media coverage. India replaced Unites States as the second most favored destination for Foreign Direct Investments (FDI) in the world (as per the FDI Confidence Index, 2005), with China holding on to its first place. This was a great achievement, but unfortunately many

people in the country are unaware of it. This development indicates the economic strength of this country and it shall remain as a proof for what Liberalization has done to this country. Many other factors other than the Liberalization like, low inflation, large foreign reserves, stable government at the center, appreciating rupee and macroeconomic fundamentals of the economy have helped India to win confidence of Investors from all over the world.

However, India is still lagging behind China in attracting Foreign Direct Investments (FDIs) in to the country. Nearly 45% of the FDI inflows that flows in to Asia are going in to China and the Indian government should carry out a lot more reforms, if India has to catch up with China in attracting more foreign direct investments. One area that needs a lot of reform in India is its labor laws, since many foreign investors are a bit reluctant to invest in India, because of its labor friendly laws, which protect Indian workers to a large extent, irrespective of their productivity.

Another factor that gives China a clear advantage over India is the fact that China opened its economy much earlier than India and the process of Liberalization has been very slow India. If India could speed up its reform and accelerate liberalization it could easily overtake China in attracting Investments from rest of the world, but one might have to wonder whether this would be

possible in the case of India, because of the bureaucracy entwined in the administrative, political and judicial systems in the country. Many of the South East Asian countries are racing ahead of India, in attracting Foreign Investments and even though India has many positives, the political system in this country is hindering its economic development.

The Indian Government wants to attract $150 billion in FDIs in the next decade, but it has to open up sectors like Petroleum, Power, Infrastructure, Retailing, Insurance, Real Estate and Telecom, to achieve the above target. With the left parties in India, opposing any such move by the government to open up the above sectors, the government may face a lot of difficulties in achieving its targets.

FDI investments can bring in more employment opportunities to India, eventually strengthening its domestic economy. Recent reforms in FDI policy in 2005, allows up to 100% stake in ventures. Apart from this, reforms on industrial licensing requirements and on business expansion, coupled with the availability of highly skilled managerial and technical professionals in the country, have facilitated FDI inflows in to the country in the last few years. Moreover, Indias strength in information technology, auto components manufacturing, textile and pharmaceutical sector etc., are attracting more and more foreign investors into the country.

If India has to compete successfully with China in attracting more FDIs in to the country, it should further rationalize its policies on tax structure, trade barriers, investment, infrastructure development, labor reforms and give a greater thrust on privatization and deregulation. Efforts should be undertaken to minimize processing time taken for permits and the government should open more trade options to the investors.

The FDI confidence index compiled by A.T. Kearney for 2005, says that the India and China have achieved unprecedented levels of investor confidence in the last few years. However, according to this report India received only $5.3 billion in FDI in 2005, compared to $60.6 billion that went in to China and this disparity is largely because of the fact that India failed to initiate investment-attracting reforms until 1991. The report also adds that India will remain as an attractive option to foreign investors and FDIs, as long as the government focuses on reforms and infrastructure development in the country.

If everything goes well for India, it can replace China as most preferred destination for Foreign Direct Investments in the years to come. But, if the government comprises on reforms and development, we may loose our second position in the FDI confidence index to Unites States, which still remains as an attractive option for Foreign Direct Investments.