FDI mantra

After the debacle in Bihar, the National Democratic Alliance-led Centre has taken the suggestion of many of its sympathisers on board and moved ahead with economic reforms. On Tuesday, the Centre eased foreign direct investment norms in 15 sectors, including construction, defence, mining, civil aviation, pension, and broadcasting. According to various agency reports, the government also increased the financial power of the Foreign Investment Promotion Board to give single window clearance for investment projects from Rs 30 billion to Rs 50 billion. Such a landmark policy decision follows recent data released by the government that India received foreign direct investment worth of $19.39 billion in the April-June quarter, which is 29.5 percent more than that received in the same period last year. “The crux of these reforms is to further ease, rationalise and simplify the process of foreign investments into the country and to put more and more FDI proposals on the automatic route instead of government route where time and energy of the investors are wasted,” said the government. Suffice to say, this is a welcome decision, considering the current credit crisis that has engulfed the Indian banking system, especially those in the public sector. Those in the public sector remain in a critical state, with burgeoning non-performing assets. Worryingly, experts have argued that the worst may still be ahead. Although the Centre chalked out its strategy for public sector banks ten months, there has been little or no progress. With a shortfall in domestic credit, the Centre has no choice but to seek investments from abroad for large-scale infrastructure development that the nation sorely requires. Moreover, India’s top conglomerates have been under immense financial stress, despite their attempts to cut debt by selling assets and cutting capital spending, according to a report by Credit Suisse Group, a leading global financial consultancy firm. The total debt at the top 10 most indebted groups has risen seven times over the past eight years and adds up to 12 percent of the loans in the banking system and 27 percent of corporate loans. Under these circumstances, opening up the economy to foreign direct investment surely seems the way to go. However, there are certain concerns that need to be addressed. 

 The Indian market has seen a meteoric rise in user groups with ample user groups for various types of commodities and services. However, in the preceding years, controversial rulings regarding tax evasion such as the Vodafone case have forced India Inc. to call the government out on its “tax terrorism” policies. On its part, the Centre is preparing a plan to deal with the problem of a large number of tax disputes, a top finance ministry official said, in a bid to clear an almost intractable issue that’s given the country’s investment regime a bad name. As leading Indian economist Ajay Shah wrote in a recent op-ed column, “Legal risk associated with taxation and arbitrary actions of the tax authorities have created a climate of fear. The first area of work is thinking clearly about tax policy. If our foundations are confused, the private sector cannot anticipate future actions and decisions taken by the tax authorities could be internally contradictory.” Meanwhile, experts have contended that India is expected to benefit from the slowdown in China and the overall sluggishness in global commodity prices including crude oil is expected to provide a cushion to the growth fortunes of Asia’s third-largest economy. India has also moved up on Global Competitiveness Index by 16 places to 55th position. While there has been a demand for accelerating the reforms drive, the government has unveiled several initiatives such as “Make in India” and “Digital India” to lure investors. It has moved to ensure that the country moves up the ranking on the World Bank’s Ease of Doing Business and states have started their clean-up act on this parameter. However, there are several areas where the government needs to step up structural reforms. The areas where investors want more reforms include tax policy, labour laws, cutting red tape and issues linked to land acquisition. India has been finding it difficult to strike a balance between industrial development vis-a-vis its Make in India vision and skilling the indigenous work force. Suffice to say, the Centre could do a lot worse than increase expenditure in public education, if India is to truly the reap the benefits of FDI inflow in the long run. Education and skill development are essential elements for millions of young Indians, who enter the workforce every year.