CAPTURING THE ‘FDI’ OPPORTUNITY: INDIA’S CHALLENGES AND CONCERNS

There has been a considerable change in policies and attitudes towards foreign direct investment (FDI) in India. Distrust and suspicion of FDI in the past appears to have yielded place to a newfound faith in its ability to foster growth and development. This change in attitudes is due to a number of factors: a steep reduction in alternative sources of finance such as bank credit in the wake of the debt crisis, the demonstrable success of the East Asian countries based in part on FDI, and growth in knowledge and understanding of the nature and operations of transnational corporations (TNCs), the principal purveyors of FDI. The 1991 economic reforms were to change all this. Along with the virtual abolition of the industrial licensing system, controls over foreign trade and FDI were considerably relaxed, including the removal of ceilings on equity ownership by TNCs. The reforms did result in increased inflows of FDI.

In the year 2009-10, India has assumed a notable position on the world canvas as a key international trading partner, majorly because of the implementation of its consolidated FDI policy. The consolidation, first undertaken in March 2010, pulls together in one document all previous acts, regulations, and clarifications issued either by the DIPP or the Reserve Bank of India (RBI) where they relate to FDI into India. According to the modified policy, foreign investors can inject their funds though the automatic route in the Indian economy. Such investments do not mandate any prior government permission. However, the Indian company receiving such investment would be required to intimate the RBI of any such investment. The FDI rules applicable to such sectors are, therefore, fairly clear and unambiguous. According to Ernst and Young’s 2010 European Attractiveness Survey, India is ranked as the 4th most attractive foreign direct investment (FDI) destination in 2010 which is evident with the significant FDI in construction sectors (received the maximum FDI) which includes housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure as well as the Electronics and ITES. In fact, a growth rate in FDI is also observed in the power sector, which could make FID inflow more viable through it high returns on investment.  

Even so, the volume of FDI in India is relatively low and slowed down in the contemporary time; compared with that in most other developing countries like China. If China, with its newfound faith in capitalism, can embrace and attract substantial volumes of FDI, why can’t India, which is blessed with western institutions and capitalist organizations?

India fares well on the attributes relating to market size and growth. India’s overall record on macroeconomic stability is superior to that of most other developing countries. And judged by the criterion of the stability of policies it has displayed a relatively high degree of political stability. Similarly, the gross domestic product (GDP) per capita and resource endowments, including natural resources and human resources are notably satisfactory and indeed, same is the case for infrastructure facilities (including transportation and communication networks).  However, India’s FDI is not increasing?

 The rationale for this slow down of FDI inflow into India is mainly owing to its recent tainted images of massive corruptions, uncontrolled inflation rates and the wide gap between intent and practice of policies towards FDI. India’s foreign direct investment (FDI) has become a serious casualty of corruption-ridden governance (2G scam is one of those), as inflows to the country dipped sharply by 22%, to US$21 billion in 2011 (first quarter) from $27 billion in 2009-10. Besides allegations of corruption in telecommunications and mining, Indian red tape also featured as prime suspect in India’s losing its charms for global investors, compared to other emerging Asian economies. 

In its Macroeconomic and Monetary Policy Development Review for the third quarter of fiscal 2010-11, released on February 11, the RBI blamed “persistent procedural delays“, land acquisition problems and lack of quality infrastructure for India falling behind in the Asian foreign direct investment race. The RBI also declared that environment-sensitive policies were discouraging FDI in mining, construction and ports sector. India’s firebrand environment and forests minister has been hogging headlines for pulling up multi-billion dollar projects that he said were violating environmental norms – foreign-funded projects worth over one billion rupees ($ 22.3 million) need environmental clearance. Besides, the ‘shadow of black money’ and  with the tax-haven Mauritius contributing 42% of the FDI funds as well as Cyprus another tax-haven, contributing 4% of India’s FDI inflows, suspicions linger as to whether Mauritius and Cyprus is premier laundry for black money stashed in foreign bank accounts. The irony of the situation is that while inflow of clean overseas money has been slowed by corruption and delays in key sectors like telecommunications, infrastructure; the weak government administration and Indian red tape also featured as prime suspect in India’s losing its charms for global investors, compared to other emerging Asian economies. Certain sectors of the Indian economy—retailing, for example—cannot receive foreign direct investment, and this prohibition closes off a fruitful source of technology and skills. India presently allows 51% foreign investment in single-brand retailing. Global retail majors like Wal-Mart, Tesco, Germany’s Metro and Carrefour of France are lobbying hard to enter multi-brand retailing. Stakes are high, with India’s retail market estimated to be worth $450 billion. It won’t be easy for global majors to muscle into the retail sector, with the small shop around the corner stakeholders being a socio-politically volatile segment, and with the present UPA government already suffering an “anti-poor, pro-rich” image. According to Department of Industrial Policy and Promotion statistics released February 17, 2011, FDI from April to December 2010 fared worse than the year overall, with a 23% dip over the same period in 2009.

Nevertheless, India needs FDI inflow for its economic growth, with the GDP growth cruising steadily at a sturdy average of 9% in recent months. FDI is crucial to government plans to spend $1 trillion in infrastructure development over the next five years. The pivotal question is: how can we attract FDI inflows and put the nation in the growth path? The straight answers to this question are: better and efficient administration and policy practices of FDI, checking massive corruption and promoting private sectors to invite foreign investment. Indeed, the recent effort of Reliance, the $7.2 billion deal with British Petroleum in gas projects is a classical example in this context. It would be relevant to mention here that India’s federal bank and regulator, the Reserve Bank of India (RBI) is considering setting up a panel of experts to spot such problems clogging FDI, and ways to solve them.

Indeed, India needs more strategic FDI directives with strong regulatory management. The Modi government of India must focus on stimulating domestic demands, a vital step for attracting foreign investment. If policy makers continue on the path of economic reforms with a focus on increasing demand and competition, the flow of foreign direct investment in India will most likely increase. This will help India harness the immense potential of its young and educated workers. The foundation is in place for the economy to grow by 10 per cent a year, but further effort and unwavering commitment are needed for India to emerge as an undisputed global economic leader.  It could be envisioned that the economy recovery in India will be the strongest source of sustained growth and FDI inflows to India for years to come. 

Keshav C Das

Senior Advisor, SNV Netherlands Development Organisation

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