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Ease FDI policy to attract investors

  • India can gain from the possible exit of companies from China if it eases foreign investment policy more and takes steps to provide a more stable business environment.

These are extraordinary times. The lives of billions of people around the world have been affected to varying degrees by covid-19. Being a public health crisis of massive scale, it has necessitated stringent containment measures such as lockdowns that have sent the global economy into a shock. There is enough evidence to suggest that a significant global recession is staring at us. Not immune to the effects of the pandemic, India too will have to take measures to stem the slide across sectors and revive the economy. After the immediate focus on controlling the contagion and providing whatever immediate stimulus is feasible, the government’s efforts must turn to strengthening the nation’s socio-economic foundations and prepare a blueprint for a new India. Measures are also needed to enhance the economy’s attractiveness to fresh investment essential to drive the economy forward. That is one thing that India sorely lacks today.

According to a recent United Nations Conference on Trade and Development investment trends report, covid-19 will hurt foreign direct investment (FDI) in most countries. This coupled with falling demand and disrupted supply chains will exacerbate their economic troubles. Already, many multinational enterprises have slowed capital expenditure in the wake of declining profits. This would also likely result in lower reinvested earnings, which form a major component of FDI (bit.ly/2ysWoSu).

In this backdrop, any fresh foreign investment in the economy is welcome, and the Facebook-Jio deal is no exception. Facebook’s $5.7 billion investment in Jio Platforms has attracted the attention of the world, which is watching to see if this could mark the first step towards turning India into a digital giant. There are critics, though, who believe that the deal may distort the market. At this juncture, however, any such big FDI flow is welcome. It will promote both job creation and consumption, thus helping a post-covid economic revival.

India’s attractiveness as an FDI destination has surged in recent times. In 2019, it was among the top 10 countries attracting foreign funds, receiving billions of dollars in a variety of sectors, including services, technology, IT and telecom, and construction. Several factors have placed India in a better position than some other much larger economies such as China or the United States. A swift response in combating the covid crisis, favourable demographics, impressive mobile and internet penetration, massive consumption and technology uptake are among them. With global corporations disillusioned with China, there is an opportunity for India to capitalize on the corporate impulse to move out of that country. Leveraging fresh investments along with the existing investment base will go a long way in establishing India’s position as a leading digital economy.

It may thus be a good time for the government to treat foreign investment at par with domestic investment. The role of FDI in the Indian economy cannot be overstated. It plays a critical role in providing resources to upgrade supply chains and remove inefficiencies. This coupled with the technology and experience that foreign players bring can go a long way in helping India’s economy scale new heights. Take the example of Amazon and Walmart. Their infrastructure and technologies would help farmers and consumers. While the government’s concern about protecting small traders are valid, evidence from countries such as China shows that traditional and modern retail can coexist and grow.

As a part of its Make in India initiative to promote domestic manufacturing, India deregulated FDI rules for several sectors over the last few years. A part of its attractiveness also lies in the way it treats existing foreign investors. The government should now ease regulatory hurdles for foreign investors as far as possible to boost the economy in a post-covid world. Also, foreign investors need to be provided security and continuity in the business environment. India’s current policymaking environment is marked by significant uncertainty, which may not help the cause of attracting potential investors. This is more so when other Asian countries are vying for attention from companies thinking of leaving China.

The Organisation for Economic Co-operation and Development (OECD) Declaration on International Investment and Multinational Enterprises provides non-binding norms of responsible conduct for national governments and multinational enterprises. It recommends an inter-linked and balanced approach in the way governments treat FDI. It also advises governments to provide national treatment for foreign-controlled established enterprises to avoid conflicting requirements being imposed on such enterprises in its home and host country jurisdictions. It also calls for cooperation on investment incentives and disincentives (bit.ly/2zfRjgb). Although India has limited participation in the OECD, it may be in its interest to consider incorporating some of these rules to attract FDI in the critical days to come.

The author is president, Society of Indian Law Firms

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