Differing views on liberalizing FDI

In the days following the general election, there has been much speculation about whether the new government is likely to loosen the restrictions on foreign direct investment in India. Speculation has ranged across sectors, from insurance to defense, retail and e-commerce. However, opinions differ on whether making changes to the regulations around foreign direct investment should be one of the new government’s first moves.

In the Economic Times, Rana Kapoor argues that the government has a clear mandate to ease the restrictions.

“All economic stakeholders are looking to the leadership of PM Narendra Modi to take firm steps in pursuit of reviving the investment cycle and growth. In less than 60 days, the new government will present the Budget for 2014-15. There are many things it can do to boost investor confidence.”

“The government should clear pending project proposals and approvals, quickly. It should liberalise foreign investment across key sectors, and take steps to privatise sick state-owned companies and divest government holding in the top 10-15 PSUs, to generate over Rs 1,00,000 crore. While India continues to draw healthy interest from domestic and foreign investors alike, for investments to materialise, we need a transparent, systematic and non-discretionary policy framework that gives confidence to the investor community, particularly in the process of issuing licences and permits. Further, inordinate delays in clearances and in the passage of important Bills discourage investors from taking a long-term view.”

The Times of India agrees, stating that liberalizing FDI should be at the top of the new government’s to do list.

“The India story came off the rails recently. The NDA government won a huge mandate on the promise of reigniting growth. It's welcome that PM Narendra Modi's list of 10 priorities places emphasis on the economy, including infrastructure and investment reforms. There are two big-ticket moves the government can undertake to revive interest in the India story: scripting a liberal FDI framework and implementing a much-delayed GST regime.”

“Sectors like defence, railways and e-commerce are expected to benefit, as is insurance where the cap remains stuck at 26% despite most experts recommending otherwise. Foreign companies will bring in not only sorely needed capital but enhanced technological capabilities and expertise as well.”

Sitaram Yechury, writing in the Hindustan Times, emphasizes the potential downside to foreign investment in India, across all sectors.

“Policy pronouncements favouring foreign capital, including in the areas of defence production, can adversely affect domestic industry and national security. Foreign capital is welcome only when it expands our existing production capacities; generates additional jobs and upgrades India technologically. That it will shrink existing jobs is why even the BJP opposed FDI in retail trade.”

He argues that the BJP’s efforts to create a more business friendly environment for international companies may negatively affect India’s citizens.

“These initial signals run contrary to the high hopes generated by the demagogy of ‘development’ and ‘good governance’.”

In the New Indian Express, Anuradha M Chenoy is also dubious about the positive impact of increased FDI. She looks at other emerging economies as possible points of comparison.

“The opening up of the Indian economy to unlimited foreign capital like 100 per cent foreign direct investment (FDI) in the defence sector, single and quick clearances and benefits to big capital, including to all kinds of multinational companies, are the fast steps that are being taken by the newly elected Indian government…. when a country like India is going in for opening up, it might on the one hand be trying to bring in capital and kick-start a stagnating economy, but on the other hand, the very structures that kept the country stable can be at risk. Earlier, when the UPA regime initiated the process of opening up, they developed strategic ties with the US. A decade later, it became clear that the attempted strategic shift and the belief that India would get great power status on account of this shift was a mirage.”