BackIndia needs to welcome multinational capital
Attracting FDI will require more than just a committee of secretaries
Premium
A committee headed by finance secretary Arvind Mayaram has recommended raising the various sectoral caps on foreign direct investment (FDI), including in contentious areas such as defence production. This is undoubtedly a welcome step. India does not get as much FDI as it should, and the limit on foreign ownership in some sectors is surely part of the reason. But it is not the only reason, as shown by the insipid early response from multinationals to the more liberal investment rules announced in September for multi-brand retailing. It is nearly a year since foreign investment limits were increased, but global retailers are yet to commit any money to India.
The total amount of FDI coming into India has been falling over the past three years. And what has come in has been dominated by deals to buy stakes in businesses that are already up and running, rather than in new projects. For example, this week saw global consumer goods giant Unilever make a $5.4 billion open offer to increase its stake in Hindustan Unilever, its local subsidiary. BP invested $7.2 billion in 2011 to buy a stake in the oil and gas blocks operated by Reliance Industries. Vedanta Resources bought the Indian assets of Cairn for $8.7 billion in the same year. Much earlier, Vodafone put down $11.1 billion in 2007 to buy a controlling stake in the mobile telephone business owned by Hutchison Whampoa.
There is no reason to turn away such investments, since India needs dollars from all types of sources to fund its record current account deficit. The indirect benefits from FDI—knowledge transfer and technology diffusion—are just as relevant in such corporate deals as well (as the BP investment in Reliance Industries at a time when the latter is having trouble maintaining output in its KG D6 gas fields). But it is also true that FDI in greenfield industrial projects has been meagre. Just look at the unending Posco saga, with the $12 billion proposal by the South Korean company to build a steel mill in Orissa stuck in a regulatory maze for nearly a decade.
According to Investing Across Borders, an initiative by the World Bank to measure competitiveness among countries in attracting foreign investments, the restrictions on foreign investment in India are much higher than the average in South Asia and even among the BRIC (Brazil, Russia, India, and China) countries. It is no wonder, then, that BRIC economies attract more FDI than India relative to the size of their economies.
The trouble involved in doing business in India caused by many redundant procedural requirements, as highlighted by the facts above, has become quite evident in recent times with the delay in retail FDI even after the go-ahead by the government despite widespread opposition across the country. This shows quite clearly that increasing the investment cap is not the panacea to the country’s FDI woes. For instance, in the case of Swedish furniture company Ikea’s proposal to open stores in India, the government pondered for months over whether the company should be allowed to open coffee shops in its stores. The same has been the case with other potential entrants—such as the super-market giant Tesco, for example—that have been sceptical about entering the Indian market due to rules dictating the mandatory investments to be made in back-end infrastructure. It is unclear what purpose such mandatory requirements really serve, except scaring away investors who would find it infeasible to do business in such an environment.
But, more importantly, all this points to the amount of red tape and rent-seeking opportunities that still prevail in the system even decades after liberalization. In the attempt to attract more FDI, increasing the investment cap can obviously help by reducing existing barriers. But that alone may not be sufficient to convince foreign investors. It remains absolutely essential to provide simple and clear rules that make doing business in India an attractive option for foreign investors. India’s policymakers would do well to understand the trade-off that lies between a huge bureaucracy regulating capital, and the willingness of foreign investors to invest in India.
How can India end the drought of foreign investment? Tell us at views@livemint.com
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
