FDI India investment
FDI India investment – India is more open than it has ever been to international investment. Barring multi-brand retail, India today allows FDI in almost every major industry, but the desired result has not been achieved.
It’s tough times. There does not seem to be any more running away from that fact. The growth story of India has stalled, with growth dropping below 7%. There is a decline in confidence and spending, and there has been a free fall in industrial output. All savings and consumption are growing. Some say these are some of the hardest times that the Indian economy has seen in the past decade or so. That makes the agony different this time is that the financial sector is also the centre of the current crisis.
All the economy’s levers are under duress. And obviously, a sectoral approach is being taken by the government of Modi to bring the economy back to health.
The slew of Finance Minister Nirmala Sitharaman’s announcements last week undone some of the damage that Budget 2019 caused. This included the cancellation of the foreign portfolio investor surcharge and the announcement of public sector banks ‘ upfront recapitalization. Many of the interventions focused on increasing capital transmission and demand fueling. Another collection of announcements followed this week— this further opening up India’s economic sectors to foreign direct investment (FDI). Clearly, the government hopes that international investors will generate interest. FDI India investment
The boldest move by the government was to allow 100% FDI for open sale under the automatic route in coal mining (as well as the construction of allied infrastructure such as washeries). This move threatens the government-run monopoly of Coal India and could lead to severe resistance from trade unions-India’s coal industry was nationalized in 1973. The policy change is consistent with the government’s target of mining 1.5 billion tons of coal by 2020, and the government is also undoubtedly hoping the move will generate investment and industrial activity. This would reduce India’s import bill for coal and give greater access to cutting-edge mining technology from around the world to the economy.
The Modi-led government has opened the economy far more than any previous government to foreign investment for all its nationalistic fervour. If the government of Narasimha Rao first unshackled the economy in 1991-often referred to as the liberalization period of India-Prime Minister Modi took this agenda very vigorously forward. It had faced protests from the Swadeshi Jagran Manch in the first term of the NDA government as it floated the idea of raising FDI limits in the insurance sector. However, tacit acceptance was met with the later steps of the government towards opening up sectors. FDI India investment
While much ideological opposition has not met the opening of India’s economy, the movements have not attracted much FDI either. Yes, last year’s FDI inflows to India fell by one quarter to $44.4 billion. In several industries, including non-bank financial firms, single-brand retail and infrastructure, the government also relaxed FDI rules last year. Former finance minister Arun Jaitley had announced at least three times in the Modi government’s first term the opening of several sectors of the Indian economy. For India to build the roads, highways, airports and ports it needs, and boost growth, foreign investment is crucial.
In contract manufacturing and in single-brand retail, one hundred per cent FDI was also allowed under the automatic route. However, the precise details of the 30 per cent local sourcing requirements have been modified, and online sales are now permitted without the prior opening of brick and mortar stores.
The success of these movements, however, depends on a number of details. For example, while the government is opening coal mining to foreign investment, it is still holding pricing power in that market. That could be a barrier to investing in a major international business. Any business that chooses to make the necessary massive investments would want the opportunity to price the coal that it eventually sells. There is also some confusion regarding coal transport, for instance, will Coal India shipments be given first priority?
Liberalizing standards is just one part of the solution. India’s FDI story has been somewhat standard over the decades, with the country attracting investment in service sectors such as finance and software, with one-off FDI investments entering telecommunications or infrastructure. Data for 2018-19 indicates that the services sector attracted the highest FDI equity inflow-$9.16 billion-followed by computer software and hardware ($6.42 billion), trading ($4.46 billion) and telecommunications ($2.67 billion). Total FDI equity inflows hit US$ 3.6 billion for the month of March 2019. In 2018-19, India’s largest inflows of FDI capital came from Singapore-$16.23 billion-after Mauritius ($8.08 billion), the Netherlands ($3.87 billion), the US ($3.14 billion) and Japan ($2.97 billion).
Nevertheless, during the period of the UPA-II administration, FDI in manufacturing made just 28% of the total FDI, slightly below the average level of 44%.
India needs to actively address issues of implementation and policy irritants that have been intensifying for companies wanting to use the FDI route to invest in the FDI country market. And in addition to the regulatory dimension, the government must also take up the challenge of convincing companies of the consistency of their policies and that their interests will be protected and they will not be subjected to tax terrorism.
Biswajit Dhar and K.S. economists In a book, India’s Recent Foreign Direct Investment: An Analysis, Chalapati Rao argues that the country needs to do a great deal of homework on its FDI strategy. In this context, FDI inflows are viewed as a bellwether of the economy— not getting the right kind of inputs can lead to serious misjudgments.
The authors quote a discussion paper on ‘ Industrial Policy 2017, ‘ circulated by the Department of Industrial Policy and Promotion, expressing dissatisfaction with India’s FDI levels and non-profit inflows, and highlighting the need for a review of the country’s FDI policy. It spoke about India’s “volume-centred” approach to FDI, and said such funding was increasingly being sought to alleviate the current account deficit — and correspondingly, the role of FDI as a development finance and technology provider had decreased.
Here is the hope that India will be more comprehensive in its FDI policy this time around.