By now, to the foreign investor, the letters FDI stand for: Finding Disarray in India. A flurry of government announcements within a month is adding confusion to a process that, given the slowdown in foreign capital, desperately needs clarity.
In mid-February, the government decided to change the policy for foreign direct investment. A week after the cabinet release, the department of industrial policy and promotion issued two amendments, or “press notes”. These were meant to increase clarity; instead, they prompted a plethora of questions ranging from company ownership to downstream investment. In what seemed an implicit acknowledgement of its lack of clarity, the department released a third press note for further clarification last week.
Illustration: Jayachandran / Mint
Yet, with this latest salvo, the government continues its quest to befuddle the foreign investor. Questions the previous press notes raised haven’t been answered. For example, the previous amendments suggested an FDI backdoor in restricted sectors. The newest press note claims to close this loophole, but it doesn’t—a foreign entity can still use an Indian-controlled firm to make indirect investments. What’s more, discrepancies in calculating FDI remain.
These changes have effectively moved India from a sector-specific policy to a company-specific one, where every firm comes under the scrutiny of the regulator, Foreign Investment Promotion Board (FIPB). This naturally solidifies the increase in FIPB’s powers. For instance, FIPB now has the final word on any companies used solely for investing purposes, regardless of the sector. This rise in bureaucratic bottlenecks will only dissuade the foreign investor, or persuade him to resort to offshore entities.
To the government’s credit, it has put its foot down on one issue: This amendment defines what needs regulatory approval by repealing a 1999 policy that ambiguously empowered FIPB to check all downstream investment. Now FIPB has been empowered to check investment by foreign-owned firms, as required. That’s clarity all right, but hardly a cause for celebration.
If the government wants to boost FDI, it would be far simpler if it just raised sectoral caps. But the United Progressive Alliance (UPA) wants to skirt around this issue thanks to the political complications an election year brings. In its rush to claim an electoral achievement, the UPA is worsening matters.
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