The question itself contains within it the obvious presumption that foreign direct investment is eminently desirable. I have no quarrel with that presumption, but I do wish to place it in a context that will support the roadmap I've been asked to lay out.

Towards that end, it may be useful to restate a basic tenet of development economics. Economists employ a rule of thumb labelled the Incremental Capital-Output Ratio or ICOR, which is essentially a formula that articulates the quantum of investment, or capital, required to achieve a certain rate of growth. So, if we target a growth rate of 8 per cent in Indian GDP, we will, per force, need to ensure a rate of investment of 32 per cent, given an ICOR of 4.

India's savings rate has not yet touched the levels that this formula tells us is sine qua non for ensuring the growth target we have in mind, and indeed, must have in mind if we are to banish poverty within a reasonable time frame. When there is a gap between the savings rate within a country and the rate of investment required for achieving the targeted growth rate, then that gap is usually met by-you guessed it-foreign direct investment (FDI).

Now that is essentially a mathematical argument in favour of FDI. In addition, I'd like to cite four more reasons in support of FDI that are soft in nature. First, and most important in my view, is that foreign direct investment brings technology and innovative practices to India. Even when it is brought in by MNC-controlled subsidiaries, there is an inevitable osmosis of knowledge that takes place through their Indian employees, who leave and join other firms or even better, become entrepreneurs themselves.

Secondly, overseas firms can deploy large quantities of capital, which is just what the doctor ordered for large infrastructure projects. Indian entrepreneurs can, by and large, access whatever capital they need today, but there are still only a handful of domestic business houses that are capable of undertaking, or willing to make the kind of investments needed for long-gestation, uncertain infrastructure plays.

Thirdly, the entrance of some key global players can provide India vital access to downstream elements of the value chain. For example, if India wants to become a major exporter of agro-products and processed foods, then it is critical to gain access to global retail outlets and brands which overseas consumers trust. Encouraging large global players to enter India encourages them to view India not just as a market, but as a key participant in their supply chain.

Fourthly, FDI brings in players who raise the scale of the industries in which they operate. Let's take the retail sector, which is the subject of intense debate. If a giant global player comes in and targets the procurement of $5-billion (Rs 22,500-crore) worth of goods annually from India, then this will allow Indian producers of all kinds of goods to make a quantum leap in their scale of production with dramatically reduced risk. We seem, therefore, to be missing the point that FDI in the retail sector is not just about retail, but is about making India a manufacturing superpower!

This last point is crucial. We need to understand, once and for all that information technology (it) alone is not going to solve our employment needs. Despite great success thus far, the reality is that it employs less than 1.5 million people today. I recall Bill Gates saying at a Confederation of Indian Industry (CII) meeting in Bangalore that India could not ignore the manufacturing sector if it was to achieve sustainable growth and provide employment opportunities. The multiplier effect in manufacturing is far greater and, therefore, more valuable for a country with our population and demographics.

So, the bottom line is that we need to up the ante in our efforts to attract FDI, and we need to focus afresh on investment in manufacturing. What, specifically, do we need to do?

Let me begin with a prescription that is obvious and, yet, worth restating: we cannot, and must not, let our GDP growth rate slip below 8 per cent. We must understand that no amount of improvement in our customer-friendliness and easing of regulations will help, unless we are growing at a rate that makes the world sit up and take notice. Arguably, there are many areas in which our regulatory framework is superior to China's. But it is steroidal growth which keeps the legions of investors coming. For this, the political leadership, from the Prime Minster down, must make it an unequivocal virtue to pursue GDP growth targets.

I recall when, with a CII delegation, we met B.G. Lee, then Prime Minister in-waiting of Singapore, and asked him about his interest in India, he said simply: "How can I ignore a country growing at 10 per cent?" He was referring to the latest quarterly growth figure for India and then proceeded to ask whether that growth was year-on-year or quarter-on-quarter, because Singapore had just announced 11 per cent q-o-q growth. I found it striking that a Prime Minister was so focussed on growth metrics and was so constructively competitive about relative GDP figures. Happily, our own Prime Minister recently referred to the half-yearly achievement of 8 per cent growth with great pride and asserted that he was aspiring to 10 per cent levels. That kind of talk will do more to encourage FDI than any single other measure.

Coming to more mundane, but important measures, I do not want to adduce a lengthy laundry list of things to do, especially since such lists are ubiquitous and are quoted ad nauseam. I'd like to focus on just three items which deserve priority, and could radically transform the investment climate.

1) Infrastructure, as I've mentioned earlier, is an area starved of investment. In the World Economic Forum's latest global competitiveness report, "inadequate supply of infrastructure" was by far the highest ranked impediment to doing business in India. Hence, attracting infrastructure investment has the double benefit of inducing growth as well as kick-starting a virtuous cycle of investment in all other sectors of the economy. In particular, we stand no chance of becoming a manufacturing power without the bedrock foundation of efficient infrastructure. In order to make headway here, we need to speedily put together templates for various infrastructure projects. By this, I mean a set of rules and guidelines for financing, implementing and operating large projects in a transparent manner. Despite occasional hiccups, the government did manage to set in place such guidelines as well as a regulatory authority for mobile telephony, and the result is that we are today the fastest growing mobile phone market in the world. In our own group of companies, we experienced inordinate delays while bidding for South Asia's first privatised water supply project in Tirupur. Many important international participants in our consortium lost interest along the way. Five years later, thanks largely due to the persistence of the Indian bidders, the project is successfully underway, and there is now a template which will, no doubt, shorten the gestation period of new water supply projects.

2) India's Special Economic Zones are at the point of take-off. The government has moved with alacrity to conceptualise SEZ legislation and to create an open market for the participation of private enterprise. Indeed, it makes great sense to emulate China, which began its transformation through SEZs that served as laboratories for more widespread reforms. In fact, one could argue that such an approach has even greater merit in a democracy, where it is far more difficult to override vested interests and bring dramatic change overnight in legislation and in urban landscapes. How much easier it is to lay down new infrastructure and a new way of living in a brand new township than it is in Mumbai! But if these zones are to attract new manufacturing investment, then they must have a more flexible labour policy than what exists outside the zone. Neither the central government nor the state governments have shown the courage to take this step. Surely, it should not take much courage to institute this policy within a limited geography? If one enlightened state government enacts these new rules, it will receive a torrent of investments to the detriment of its competitors.

3) My last and simplest recommendation: open the retail sector to FDI. I will not belabour this point since I have already elaborated on the reasons for doing so earlier. What bears repetition is that a thriving and world class retail sector is not just an engine for consumption and growth, but also the route to becoming a world-scale manufacturing force.

There is one final and overriding reason why we must become more hospitable to FDI: in our typical fashion of underestimating ourselves, we have overlooked the fact that today, many Indian companies are on the verge of becoming robust multinationals and will seek to conquer new territories abroad. These new champions are confident of meeting foreign competition in the Indian market and do not need the security of non-tariff barriers. Soon, our government will have to support these companies in prying open lucrative overseas markets. As a nation that will nurture new multinationals, we will, therefore, be doing ourselves a favour by throwing a welcome mat down for FDI and setting a trend that other countries will necessarily have to follow!

The author is Vice Chairman and Managing Director, Mahindra & Mahindra Ltd