Millennium Post

More FDI is not a panacea

Engulfed by high imports of gold and oil along with decline in invisibles, the Current account Deficit (CAD) made a historical jump causing paranoia about debt traps in the imminent future that is reminiscent of the 1991 crisis. In 2012-2013, CAD has increased to 4.8 per cent of the GDP. Caught in the ambivalence of external commercial borrowing which increased by 21.2 per cent and total FDI plunging by 21 per cent, less room is left to set off the alarming CAD. The only major ‘rescue measure’ available was to increase Foreign Direct Investment (FDI) flow into the country but that too lost its sheen after FDI policy debacles in Multi-brand retail. Since the policy was introduced in September 2012 not a single FDI proposal was made for Multi-brand retail. Instead, multiple clarifications were sought by the exacerbated foreign investors for the viability of the policy. It took nine months to clarify the queries and even then, they failed to enthuse the foreign investors. The foreign investors’ clamour forced the Commerce Minister to revisit the policy and consider for further simplifications

This means that another set of time periods is required for tuning the policy to sucessfully woo the foreign investors. Paradoxically, while the special Committee under Ministry of Finance took only three months to recommend a new policy for relaxation in FDI, it took nine months for the Ministry of Commerce and Industry to clarify the foreign investors’ queries on Multi-brand retail. Apprehending surge in CAD, Finance Minister P  Chidambaram rung the alarm bell in his budget speech for 2013-2014. He asserted that the country should find $75 billion over the next two years to finance the current account deficit. A special committee was set up headed by Secretary Arvind Mayaram to recommend the panacea for improving the FDI flow. The Committee observed that the main hurdle in FDI flow was the sectoral cap in specified industries. These industries, though sensitive, warrant a high potential for FDI.

The Committee accordingly recommended for rise in FDI capital in these industries. It suggested an increase in capital on FDI limits in multi-brand retail from 51 to 74 per cent, telecommunication from 74 to 100 per cent, insurance from 26 to 74 per cent, defence production from 26 to 49 per cent, airlines from 49 to 100 per cent and public sector banks from 20 to 49 per cent.

The evidence however suggests that the main concern for the foreign investors was not the cap on FDI but the policy ambiguity and yearning for a FDI friendly policy. China and Thailand – the two emerging destinations for FDI, too have restrictions for FDI in retail but they did not pose glitches for the foreign investors to invest in retail. In China for instance, FDI in retail are restricted in sensitive areas like agricultural products, edible oil, tobacco, agricultural chemicals and fertilisers. Also FDI in multi-brand are restricted by number of chain stores. In ThailandFDI in retailing is restricted by benchmark of minimum investment.

After a commendable growth in FDI during 2008-2009 to 2011-2012 defying the Lehman shock, FDI plunged deep down in 2012-2013. It further nosedived by 21 per cent in 2012-2013 – from $46.6 billion in 2011-2012 to $ 36.9 billion in 2012-2013 after a spur by 34 per cent in the previous year. It is surprising that there was sudden drop in FDI flow in 2012-2013 despite the fact, that since September 2012 a slew of reforms in FDI were taken to woo the foreign investors. Besides FDI in Multi-brand retail, more doses of liberalisation were inducted in FDI in Single brand retail. Reforms included FDI in civil aviation with a cap of 49 per cent, a bill for FDI in pension fund up to 26 per cent limit and a long pending amendment bill to raise FDI limit from 26 to 49 per cent. Notwithstanding, FDI failed to enthuse the foreign investors. No doubt with the global slump and financial instability in USA and Europe there is an adverse impact on the growth of FDI inflow in the country. Moreover, the paramount factor which impeded the FDI flow was the complex policies and procedures which turned unfriendly to the foreign investors.

The Finance Minister P Chidambaram is running wall to post by visiting prospective countries with a begging bowl to invest in India with an aim to hedge the current account deficit from rising above the alarming level of 2.5 to 3 per cent of GDP. The Ministry of Commerce, the mainstream to promote a friendly FDI policy, on the other hand is shackled by bureaucratic tangles that are cause delay in unveiling the simplified policy. There lies the irony.

Can India afford to make an inordinate delay in announcing a practical and viable policy to woo the foreign investors at this juncture? It is noteworthy to mention that India has always been compared with China as potential investment destination for foreign investment. After the Lehman shock, FDI initiatives ebbed in China due to slump in export markets in USA and Europe and cascading impacts on high wages due to up-valuation of the Chinese renminbi. Wages in China sparked by 30 to 35 per cent over the past two years but China has too has failed to raise domestic demand by infusing big monetary supply.

Given the situation, large opportunities are available for diversion of FDI from China to India. India scores on several points to edge out China to woo foreign investment. China is loosing cost competitiveness due to rise in wages and faces sloth in domestic demand due to weak base of consumption oriented growth. IPA
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