Modi must plug loopholes

Budget for 2014-2015 dampened the hopes of foreign investors, who reposed high confidence on Modi’s concept for rebooting the manufacturing sector as the base for growth. The euphoric BJP manifesto, which said that ‘We should not remain a market for the global industry, rather, we should become a Global Manufacturing Hub’, lost its sheen with his first Budget which could have acted a precursor to Modi’s bent towards foreign investment to create a manufacturing hub. 

No special incentive was proposed to woo the foreign investors. Given the global perspectives of foreign investment, raising the FDI cap on insurance and defence from 26 per cent to 49 per cent, cannot be reckoned as the major incentives to attract foreign investment.  

At present, FDI initiative is bogged down by restrictive policies of land acquisition and multiple clearances required at Centre and state level. Against the high hope for scrapping the retrospective tax, budget escalated fear for gridlock to retrospective taxes.  Silence on GAAR rules sparked alarm since they included stricter rules on foreign investment from countries, with whom India has double taxation treaty.  None of these issues were addressed in finance minister’ speech pertaining to reforms or dispel the fears.

Land acquisition has become a gruesome procedure under the new Land Acquisition Act. It takes five years to acquire a land as compared to three years in the earlier system. Under the new provisions, mandatory obligations of 80 per cent farmer’s consent, paying out for land four times more than normal value in rural areas and two times more in urban areas, were seen harder than previous policies. Besides, rehabilitation and resettlement of the farmers are additional burdens of the buyers of the land. These hard regulations deterred investor’s interests and delayed a number of major investment projects like power and major manufacturing projects.

Given the current global perspectives of FDI, which has been triggered by the merger and acquisition after Lehman shock, retrospective tax issues should have been addressed with a clear vision. Instead, finance minister’s assertiveness on ‘the sovereign right of the government’ and his silence on the pending cases of retrospective tax disputes in the Budget speech wobbled the foreign investors’ confidence. This went counter to Modi’s success of ‘Vibrant Gujarat’, which attracted foreign investment in Gujarat. 

Unlike in Gujarat and Tamil Nadu, no single window clearance or FDI facilitation centre was proposed for the foreign investors at the central level. In Gujarat, INDEXTb and in Tamil Nadu, Tamil Nadu Guidance Bureau acts as the single window advisory body to the foreign investors. This helped foreign investors to avoid from running from pillar to post for multiple clearances.  

The budget proposed relaxation in FDI policy to promote smart cities for neo-middle class people. The budget said that prime minster has vision to set up 100 smart cities. It reduced mandatory obligations for construction of development projects - from minimum 50,000 square feet to 20,000 square feet and from minimum capitalisation of $10 million to $5 million. No relaxation was proposed in the mandatory obligation for minimum service area for housing plots, which is 10 hectares. While keeping in view the housing needs of the country, these relaxations were tip of the iceberg.

In his first budget as PM, Modi disappointed the foreign investors. UNTACD in its World Investment Report 2014, forecasted a continuous growth in world outward FDI in the next three years. It is imperative that Modi government should prop up the reforms and make India as the next generation hot bed for FDI to bolster the manufacturing base in the world.