FDI liberalization is one part of the puzzle
Many of Monday's measures are more incremental than game-changing
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Now for some good news. The government’s announcement on Monday of easing foreign direct investment (FDI) norms in a number of sectors was a welcome one—and a natural progression from the slew of FDI liberalization measures taken in November last year. This has the potential to build on India’s already impressive performance as an FDI host—one of the top 10 last year as per the United Nations Council for Trade and Development (UNCTAD), with 2015’s FDI flows nearly doubling from 2014. However, Monday’s moves are as much about shaping a particular economic narrative as much as they are about concrete measures.
Taken in context, many of Monday’s measures are more incremental than game-changing. In defence, for instance, existing policies already allow for FDI up to 49% under the automatic route and above that contingent on government approval on a case-by-case basis. The change, now, is the removal of the “access to state-of-the-art technology" clause for the latter. Other major sectors like pharmaceuticals, civil aviation and broadcasting have seen similar changes revolving around tilting the balance in favour of investment under the automatic route. The notable exception is the significant hike in the FDI cap in domestic airlines from 49% to 100%. But this is balanced by retaining the prior cap as far as foreign airlines are concerned.
This is not to downplay the importance of Monday’s measures. Indeed, they get at an important point: headline measures such as opening up sectors and raising caps may invite FDI, but clearing regulatory underbrush and creating an enabling environment are needed to incentivize it. Prime Minister Narendra Modi’s promise of minimum government, maximum governance is as necessary here as it is in other spheres. That is precisely the signal Monday’s announcement is meant to send.
But for both measures and message to be truly effective, a number of structural issues must be addressed. Take defence again, for instance. It is a massively capital-intensive sector, one where project gestation periods can extend to decades. The investment risk level is commensurately high with no guaranteed pay-off at the end of it. In such circumstances, liberalizing FDI is not enough if risk levels for foreign investors remain unsustainably high. The centre must have a clear, long-term defence acquisition road map, allowing private sector companies to plan ahead and manage risk effectively.
Or look at pharmaceuticals. Over the past few years, expanding price control has been the department of pharmaceuticals’ signal achievement. This is counterproductive for both domestic players and their potential foreign investors, particularly given the high costs and, again, long cycles of research and development projects. This is not to say that the sector can or should be entirely unregulated—low-priced Indian generics are essential both domestically and globally—but there are other means such as bulk government purchases that would serve better.
There has been much speculation that Monday’s announcement was timed to counteract the fallout from the Raghuram Rajan affair. This newspaper has held Modi and finance minister Arun Jaitley accountable for Rajan’s exit. But it would be a mistake to confuse the two issues. Revamping FDI norms is not the work of a week or even a month. This is a process that has plainly been underway since at least November. And to the Modi administration’s credit, it has talked a good game on FDI since coming to power. Perception—of stability, of clarity, of the seriousness of government intent—is important.
UNCTAD has forecast declining global FDI flows in 2016—little wonder with Europe’s and Japan’s continued economic weakness, Latin America’s instability and disastrous finances, and the threat of destabilizing events such as Brexit. That leaves India, with its relatively strong economic performance, well placed as a safe investment haven—for now.
FDI is a long-haul issue. Modi has shown that he has the stomach for the needed policy changes. Now, he must show that he is cognizant of the other measures necessary for consolidating India’s attractiveness to foreign investors.
Are the government’s FDI liberalization measures enough? Tell us at views@livemint.com.
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