The Big Picture – FDI: The way forward?
Summary:
The union government recently issued fresh note to activate the recent changes in the FDI policy that liberalize the rules for foreign investment considerably. Prime Minster Modi has also been highlighting increased FDI inflows to attract more investment into the country. But the question is, in absolute terms, how much are the FDI inflows and are the trends in those inflows indicative of FDI being viewed as the defining route towards the better growth. There are also political and ideological questions that the country has been facing over FDI.
According to experts, FDI has been doing reasonably well this year. India, presently, is severely starved of all kinds of investments- public, private, domestic and foreign. It is also widely acknowledged that there is not enough investment happening from the Indian companies. Hence, any sort of investments is welcomed. First domestic national investment should grow, that is when the foreign investment is likely to grow. In India, private foreign investment is not picking up partly because it has taken some time for the government to get its public investment growing. Public investment has now begun to grow. Public investment tends to crowd in private investment. But it will be some time before the money actually begins to flow.
It is also true that India has got enough labour but not enough capital. To catalyze our growth, lot of investment is needed. So, the best way to meet these needs is through domestic investments. But domestic investments will not come till their demand grows up. The demand grows up through public investment or government spending.
India has also topped the global investment tables in the first half of 2015, ahead of China and the US. A high ranking indicates high returns and improving economic institutions. The improvement is also due to improved local policies and conditions that affect the same investment in different countries. India’s FDI levels have jumped dramatically, from $12 billion in the first half of 2014 to $31 billion in the first half of 2015—RBI data also suggests a hike, but a much lower one, from $21 billion to $28 billion. FDI into emerging markets is showing a declining trend. But it is important to keep in mind the top status of the country is largely due to other countries looking worse.
Government also eased FDI norms recently. However, local factors can erode these profits. These include payment of bribes and kickbacks, the risk of which is compared across countries using the Transparency International’s Corruption Perceptions Index, a measure for the perceived levels of public-sector corruption worldwide. In 2014, the country was at the 85th position out of 175 countries as compared to its ranking of 94 out of 177 in 2013.
To improve the situation, the government needs to sort out the problems in taxation, repair the critically damaged banking sector and ensure ease of doing business by facilitating enabling factors (land, water, electricity, necessary clearances etc) to begin a business in India. While global slowdown is a blessing in disguise for India, to cash in on the opportunity, the country needs to fast track its reform agenda, besides improving the infrastructure sector. Companies also look at the domestic macro environment, the size of the market, and the quality of the labour force.
