#dnaEdit: Easing FDI norms

Since the Indian economy was opened up in 1991, Foreign Direct Investment (FDI) has been the central mantra of economic reforms. It has remained so even today. The latest decision of the Narendra Modi government to raise the FDI limit in almost 15 diverse sectors is a move in consonance with this direction of economic reform. Yet, it can be reasonably argued that the timing and the manner of Tuesday’s announcements resonate with unmistakable political overtones. 

Over the last two decades, successive governments and the present dispensation, in particular, have actively toyed with the idea of easing FDI caps. But the announcement actualising such a policy — significantly — has come on the eve of Prime Minister Narendra Modi’s visit to the United Kingdom and thereon to Turkey, where he will attend the G20 summit. The announcements also came just two days after the disastrous Bihar assembly poll verdict, which dealt a stinging blow to the BJP. 

The general perception is that by announcing the upscaling of FDI investment, the Modi government is trying to work on two levels: one — enhance India’s profile as an investment friendly economic destination; two — deflect attention from its humiliating defeat in a crucial state it had hoped to bring under its belt. 

The merits of the announcement, however, should not be judged by the political context of the moment. The new FDI norms need to be tested on the economic criterion — whether they would succeed in bringing more investment into the sectors which are in need of foreign investment; and whether these norms would help in kick-starting the economy and creating the much-needed jobs. Creation of jobs remains both an economic and a political imperative for this government.

Relevant data reveal that FDI inflows have been quite brisk in the last one year, and even prior to that. The thrust required to further strengthen the inflow lies in providing more channels of investment to make the FDI useful to the economy. The new announcement, on the other hand, appears to be not so much about attracting more FDI as allowing foreign investments to become more productive and creating opportunities for them to flow into more sectors. For example, allowing 100% FDI into regional transport services and into handling services at airports will create more jobs as well as facilitate air travel within the country. On the other hand, 100% FDI in up-linking and down-linking of television news channels would bring the latest technology in this sector. The move to increase FDI to 74 % in the banking sector is aimed at expanding the banking network beyond the existing public sector banks (PSBs). 

The Modi government is aware that it has to make the FDI norms flexible in order to further improve India’s ranking in the ease-of-doing-business index. Keeping this in mind, one of the key elements in the new policy is reducing the lock-in period and allowing repatriation of profits. The government has also done away with the distinction between the FDI equity flows which are of a long-term nature and the short-term Foreign Institutional Investments (FIIs). This should make the pace of flow of foreign funds into and out of the country more brisk that it is at present. The government seems to be confident of managing the fluctuation in foreign fund flows and the accompanying market volatility.

A common question that arises is how far FDI and FIIs would help in boosting the economy and the extent of their investment in sectors that need them most. A look at the Department of Industrial Policy and Promotion’s (DIPP) FDI factsheet from April 2000 to June 2015 shows that  services sector have attracted 17% of FDI equity flows, followed by construction development (9%), computer software and hardware and telecom (7% each).

Automobile sector and drugs and pharmaceuticals have attracted 5% of FDI each. Given this pattern, it can be hoped that the latest policy will now help in routing FDI to the diverse and key sectors of defence production, mining and manufacturing.