New Delhi: The Narendra Modi government, which came to power nearly six months ago, has revived interest among foreign investors in India. But the government needs to implement a raft of economic reforms, improve the domestic business environment and put in place sector-specific strategies to attract significant foreign direct investment, Srivatsan Rajan, managing director at consulting firm Bain & Co.’s India unit, said in an interview on the sidelines of the World Economic Forum’s India Economic Summit. Edited excerpts:

How do foreign investors look at the Narendra Modi government in Delhi?

Clearly, there is a lot of interest as far as inflows from FIIs (foreign institutional investors) are concerned. As far as foreign strategic investors are concerned, they are still waiting on the sidelines. They clearly sense the optimism that people are feeling over here in India. But they want the government to undertake some meaningful reforms in every aspect, whether it is operationalization of the existing investments, labour reforms, land acquisition—many things are needed to be done. I think foreign investors are waiting to see what the new government would do on all these areas. The good news is India is back in discussions. For a long time, people were very concerned about doing anything in India owing to the uncertain tax and regulatory regime. The discussions are taking place but there is a note of caution that still exists.

The government has liberalized a number of sectors for foreign investors like defence and construction. You don’t see any immediate interest from foreign investors in these sectors?

All these moves are very necessary and I think we will see more of that. At the end of the day, it may be a matter of time before the foreign investors get confident about India. But they do want to see more in terms of operational aspect of doing business in India. I think nobody denies that there is enough opportunity in this country across sectors. But people want to make sure that the capital that they deploy in this country, it’s not that they are looking for guaranteed returns, they are looking for some boundaries around the risk that they are going to undertake... One important thing that India as a country need to realize, and I think it has realized, is that it is going to be one of many options as far as investments are concerned. As you think about global trade, global supply chains and what companies are doing, India is going to be one of many options. So when you set up a manufacturing plant, you obviously want to do it where is demand and India is a country where there is going to be a lot of demand. But you also want to do it in a place where you know that you have the ability to manage the risk that comes with the massive investments that companies will be doing. All the moves that the government is making are on the right track. But I would say we are going to have to wait a little while longer.

But what are the particular risks that a foreign investor is apprehending while investing in India?

One is clearly the instability of the tax regime. The second is the ease of doing business. The central government can do certain things, a lot of it has to be done at the state level and even below at the local level. We need to make sure that the government becomes an enabler of sorting issues and we need to have an implementation spine which runs all the way through the local level. And what the government needs to do is to figure out what can it do to ease the setting up of businesses, the operation of businesses in this country. Things like construction permits, land titles, property registration—all these happen at the local level. And today when you look for options around the world, you are competing with other countries which are rolling the red carpet to enable manufacturing investments into their countries.

You can’t with a broad brush say that you want to improve your manufacturing in the country. It is the right objective but you need to get down to the next level of granularity. We need to identify which sectors are going to be relevant for India and how do we create sector-specific policies. You have to make the ecosystem around it, universities need to actually have the technology to support the industry through innovation labs.

Prime Minister Modi has been talking about India’s advantage of having the 3Ds: demand, demography and democracy. But you are saying India is only one of the options available for foreign investors. Do you mean to say that we can’t take foreign investors for granted thinking that because we have a huge market, they will come and set up shop here?

Absolutely. We should not take it for granted that people will automatically come here. One of the things we need to realize is we talk about demographics, but when you look at sector after sector, the demand in many of these industries compared to places like China is very small. Now demand will grow, but till that happens, as companies look at their capital investments, they absolutely have choices. And as the world moves towards open borders, free trade and global supply chains, people will go set up operations where it makes most economic sense for them.

The government is talking about formulating a bankruptcy code. How will that help businesses?

There is a lot of capital that is locked up. We need to find a way to unlock distressed assets. Bankruptcy codes are a necessary framework for this country to have. User entry, operations and exit—for a healthy economy, all three have to work in tandem.

How much time do you think the foreign investors will give the Modi government to see changes on the ground?

We should not have unrealistic expectations about what a government can do in a short period of time. I have always said just give the government enough time. It is not an easy situation.

On the other hand, people have high expectations as well. Beyond a certain point of time, people are going to start asking questions as to what really has been the change on the ground.

I think probably the investors will give another 6-12 months to the government.

On the skills front, what do you think should be the policy formation given the huge number of people entering the labour market every year?

The private sector has to play a major role in skilling of India. I think the government has to do more to encourage the private sector to play a role in that. At the end of the day, it has to let the market forces determine the supply and demand for skills.

A top down approach has a lot of limitations. The government should just recognize that this is not something that they can do on their own. The private sector has the willingness as well to work on this.

Which are the other sectors that you would like to see opened up for foreign investment?

Retail and services like legal services. The government has to think about what it wants to do for retail.

Many foreign investors blame the previous government for retrospective taxation. But this government has also changed the policy for retail. Has it been a dampener for foreign investors?

It is a dampener for the retail sector. There was a lot of interest from global companies who wanted to invest in India. I understand the government has its own political compulsions and they can implement only so much change in a short period of time.

The government did not reverse the earlier government’s decision to introduce retrospective taxation. Is it something that counts against the existing government?

I think people are waiting to see what the government will do on that issue. It is an important issue for foreign investors. People are looking for a framework for stability and (to ensure that) their investments are not compromised.

But the government has also said that it will not bring in retrospective taxation in the future if it creates a new tax liability. Does it satisfy investors?

It is a good step since the government so clearly stated it. Consistency of action will demonstrate that.

What are the macro challenges that the economy is facing at the time?

At the macro level, the main issue is getting the investment cycle rolling. Resolving power is an important issue. If we resolve the power problem, all the issues related to power like coal linkages, it will make an enormous difference. It will be a great enabler for manufacturing, industry. Lot of money locked up in power projects can be freed up.

What about external risks like rolling back the quantitative easing by the US Federal Reserve?

I am not concerned about it. My perspective is that the Indian entrepreneur has always found a way to deal with all of this. They have faced 40% devaluation in the rupee, interest rate cycles, and they have managed to work through all these issues and have emerged successful. Indian entrepreneurs have an enormous risk appetite.

Is there a case for bringing down domestic interest rates by the Reserve Bank of India?

You should ask the other Rajan (RBI governor Raghuram Rajan) this question. (Smiles...) At the end of the day, it will make an enormous difference for the Indian entrepreneur if the domestic interest rates come down. We need to create an environment where they feel that there is some stability. Inflation is also important. Inflation has come down in the recent months but we have been helped by the oil prices coming down globally.