The Centre’s big reform push (Hindu ,Gs 3 ,Hindu )

With India now acknowledged as the fastest growing large economy in the world and also edging up in the World Bank’s ease of doing business rankings, the time is ripe for the country to open its doors wider to Foreign Direct Investment (FDI). This is exactly what the Centre has done by raising FDI caps in some sectors (airlines from 49 to 100 per cent), sweeping others entirely into the automatic route (cable TV, brownfield airports) and diluting preconditions for sectors with restrictions (relaxation of sourcing norms in single-brand retail and technology norms for defence). FDI is stickier and more resilient to business cycles than mercurial Foreign Portfolio Investor (FPI) flows. At a time when the private sector has a limited appetite to invest and when the government is tied down by fiscal constraints, India needs to seek out foreign capital to keep its growth engines purring. That foreign investors are interested in India is evident: there has been a 23 per cent surge in inbound FDI, which touched a record $55.5 billion in 2015-16.
Even so, it is simplistic to assume that merely opening up more sectors or setting more liberal equity caps will have foreign investors queuing up to invest. India’s experience suggests that actual investment interest in the newly liberalised sectors will be tied to three factors. One, foreign investors, like domestic ones, are ROI (Return on Investment) focussed. Therefore, sectors that are already witnessing booming consumer demand — such as DTH television, airlines and pharmaceuticals — are more likely to attract quick investment flows than those that are in need of bailouts (asset reconstruction firms) or entail long gestation periods (airports or defence). Two, even if the Centre is willing to reduce initial entry barriers, frequent market or pricing interventions can deter investors. The Centre seems to have recognised this in watering down the sourcing norms for FDI in single-brand retail. But its attempts to woo FDI into pharma may be stymied by increasing price controls and the lack of clarity in the policy on essential drugs. Three, the experience with sectors such as insurance suggests that foreign investors committing long-term capital expect to exercise control over the entities they fund. Overall, there is no disputing that the FDI relaxations, irrespective of whether they were timed to signal the Centre’s commitment to reforms in the face of RBI Governor Raghuram Rajan’s exit in September, are a step in the right direction. But as we have learnt from the past, the devil is usually in the detail.


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