An FDI monitor? India mustn’t slip into over-regulation.

The plan is at a discussion level, so it is too early to tell the shape it will eventually take, should it go ahead, or the details of any rules under consideration. Its broad inspiration seems to be the existence of such oversight in some other countries. Its intent? 

To ensure that money flows into India only through legitimate channels and is used strictly for stated purposes. Sure, given New Delhi’s security concerns, illicit inflows and fund diversion for furtive use cannot be given any space by the state apparatus. 

Also read: Govt to consider foreign investment regulatory mechanism for FDI review; Inflows up 47% in Q1FY25

As classis bloc-versus-bloc geopolitics returns to haunt globalization, administrations being wary of sneaky operations in the guise of business is a sign of the times. That said, policymakers must move with caution in taking any step in this direction.

For all the business rules dropped and eased over the decades, India has been unable to brush off a global reputation for its propensity-to-regulate. Fresh regulation could send out signals that harden such perceptions. It is well known that India already has regulators for most sectors. 

While they have a wider ambit and must cover all players in a designated field, perhaps their oversight could suffice, together with extant devices meant for financial hygiene. We have extensive laws for regulating financial flows in and out of India. 

Tabs are kept not just on FDI-related movements, but other activities too. As for misuse of funds, the audit systems and other preventives in place for any sizeable business apply to foreign-funded operations as well. 

Given all this, another body with a specific FDI-risk mandate might only add to regulatory complexity. The compliance burden this may add could turn foreign investors wary, which would hurt our broader policy goal of attracting more foreign investment. 

Also read: India’s FDI restrictions need a rethink for a competitive economy

As it is, our recent numbers haven’t looked all that good. In 2023-24, inward FDI fell 3% to $44 billion-odd, extending the previous year’s 22% decline. India is yet to regain its peak of almost $60 billion reached in 2020-21 and 2021-22. 

Encouragingly, this year has seen an FDI bounce, with flows up 48% to $16.2 billion in the April-June quarter. While inflows are looking up, even a hint of over-regulation could unsettle investors.

Low domestic capital availability has meant we’ve had to rely on foreign money to keep India’s economy moving fast. While domestic capital constraints have eased, our development needs have also gone up, which implies foreign inflows must keep growing. 

Also, it’s not just capital, but also expertise that often comes with FDI. That sectoral entry gates have been opened wider in recent years is testimony to the value placed on it. Our current opportunity is to attract global businesses looking to reduce reliance on China as a site for low-cost factories. 

Also read: Govt sets ambitious target of $100 billion in FDI amid recent declines

The ease of doing business here has improved and India is offering production incentives in 14 sectors. Still, a case can be made for further deregulation in various areas to smoothen the path for foreign companies. Any ambiguity over what is allowed and what isn’t must be done away with. 

Arbitrary moves, even if a national security angle is cited, need to be resisted. Like everywhere else, a clear set of rules goes a long way to strengthen investor confidence. And even if new ones can indeed be justified, they mustn’t end up doing more harm than good.