Investors don't read surveys!

If Election 2004 taught us that market researchers/pollsters were as unreliable as the weatherman, Surveys 2004 reinforces this message, except this time around it’s foreign consultants/pollsters who appear to be in the dock.

How else can one explain the huge differences in various surveys/studies of the way the world perceives India, all released over the past 4–5 weeks?

The AT Kearney survey, strategically released a day before the better publicised World Economic Forum’s, ranks India just behind China and the US as far as attractive destinations for foreign direct investment (FDI) are concerned. And, yet, the next day, the WEF survey pours cold water over this, though this survey is not without its own contradictions.

The Economic Freedom Index, released by the Friedrich Naumann Foundation and the Centre for Civil Society in India (based on the work by The Fraser Institute in Canada), broadly conforms to what the WEF says in relation to India’s ranking, but curiously places India ahead of China when the opposite seems intuitively correct—after all, China has a much larger share of trade-to-GDP, has hire-and-fire policies, lower taxation, and so on.

In any case, since a higher economic freedom is supposed to be positively correlated with higher GDP levels, China’s clearly the leader.

Take Kearney first, and it does look the report is either guilty of overplaying India’s attractiveness or that serious investors don’t put their money where their mouths are.

India being ranked below China is pretty much of a no-brainer, but how do you explain India being ranked above the UK, France, or even Singapore considering that these countries got $63 billion, $53 billion, and $9 billion of FDI, respectively, as compared to India’s $3.5 billion in 2001.

Admittedly, countries like the UK and Mexico took a big hit in 2003, but this doesn’t make India more attractive since France still got $47 billion of FDI, the UK $15 billion, and Mexico $11 billion.

So you do feel a bit sceptical when the Kearney press statement says China and India “are aggressively challenging the United States as the world’s most favored destinations for foreign direct investment”.

Even more difficult to digest is the statement that “although the US remained the second most attractive FDI location, the gap between the US and India may be closing”.

Indeed, Kearney goes on to say “for the first time in the Index, India displaced the US to become the second most attractive FDI location among manufacturing investors, while the US fell to third place”.

Since AT Kearney’s done the survey, no one’s doubting its authenticity, but both Dr Manmohan Singh and P Chidambaram would be hard put to find evidence on the grounds of this.

The WEF survey ranks India 55th out of a total of 104 countries on the Growth Competitiveness Index (GCI), which gauges an economy’s ability to achieve sustained growth over the medium to long term.

No surprises here, but what’s intriguing is the 30th rank on the Business Competitiveness Index (BCI), which evaluates the micro-level climate for doing business while China, which gets 13 times as much FDI, is ranked 47th. Even more intriguing are the relative US and China rankings.

The WEF ranks the US first on the BCI and second on the GCI, as compared to China’s 47th and 46th ranks.

How does this compare with Kearney? Since China got more FDI than the US in 2003, you could say Kearney’s more on the ball, though Kearney itself says the US may be regaining its old FDI momentum as it got $43 billion of FDI in the first half of 2004, more than what it got in all of 2003.

But, given the huge differences in FDI inflows, surely Kearney ranking India as third as compared to France’s sixth position is curious.

Equally difficult to fathom is the Economic Freedom Index, which ranks India as 68th as compared to 90th for China, out of 123 countries. While this is clearly good news for all those who think that, intrinsically, democracies are a better place to invest in because there is more certainty of policy, the ranking does seem counter-intuitive as well.

Take the sub-index of government, which is calculated by looking at government spending, the budget deficit, tax rates, and so on. China’s ranked 121st on this sub-index, versus India’s 26th.

While government spending as a proportion of GDP in India was broadly similar (13 per cent for India versus 14 for China, according to the World Bank’s World Development Indicators in 2001), India’s budget deficit was higher, as was the tax appropriated by government (the tax-to-GDP ratio was 10 for India versus 6.8 for China).

The WDI, it is true, doesn’t have any numbers for China on government investments or subsidies, so it is possible this could tilt the balance, though it is difficult to see how this could make such a huge difference.

In any case, what is one to make of India’s 28th rank when it comes to labour market regulations, way ahead of China’s 64th? That India’s labour markets are a lot freer than those of China, that the entire world’s got it wrong when they accuse India of having rigid labour laws, right?

While that could just be true since India’s got complete hire-and-fire for over 90 per cent of the labour force that doesn’t work in the organised sector, how do you square this with the World Bank’s “Doing Business in 2005”, which ranks India 48th as compared to China’s 30 on its rigidity of employment index?

As the old saw goes, there are lies, damned lies, and there are statistics … in this case, surveys!