By deciding to ease the caps on foreign direct investment (FDI) in civil aviation, petroleum, natural gas and commodity exchanges, the government has sent out two overdue signals.
First, economic reform has not been completely buried in the run-up to the national elections that are due next year, at the latest. It would be good if the government now mustered courage and eased FDI norms in retailing and insurance. At stake are reform of Indian agriculture and more long-term finance for infrastructure.
Second, many believe that India is uncomfortable with foreign capital inflows. This feeling has grown after the authorities tightened norms to control the flow of hedge fund money into the Indian stock market through offshore participatory notes. There is also a lot of loose talk about imposing capital controls. This despite the fact that the government and the central bank have often clarified that it is portfolio flows rather than FDI that worry them.
FDI is likely to touch $26 billion this year, five times what it was five years ago. That’s good news.