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HomePolicyThe FDI Conundrum in India

The FDI Conundrum in India

By Debotosh Chatterjee

Edited by Nidhi Singh, Junior Editor, The Indian Economist

Much has been said about the policies and practices that the fledgling Narendra Modi government ought to undertake in order restore the astronomical economical growth rate and social stability that India had seen, during its heydays, in the last decade. Such discussions have mostly concentrated on the multitude of oft repeated topics that include curbing food inflation, reining in the prices of petroleum goods and stabilizing the Indo-Pak relations – the focus on most of which has emanated from the highly promising contents of the electoral manifesto that Mr Modi and his colleagues of the Bharatiya Janata Party had dished out to the hoi polloi, leading up to the recently concluded Lok Sabha Elections. The one thing which has sadly escaped the attention of most of the bigwigs in our policy making corridors, inspite of being vaunted as a potential game-changer in India’s hunt to rediscover itself amid the globally effective financial doldrums, is the issue of Foreign Direct Investment (FDI).

Owing its inception to former PM Manmohan Singh and his shambolic UPA II government finding themselves badly trapped in a financial quagmire by the latter half of 2012, the concept of Foreign Direct Investment was hailed as a saviour for the parched Indian economy at a time when national reserves were perilously warning us about the possibility of an encore of the 1990-91 fiasco in the making. Even though high flying expectations born out of the introduction of FDI, in a whole new avatar, in the country were soon toned down on account of quintessential policy paralysis and irresponsible execution of plans, the concept in itself still has found several takers, most of whom believe that the key to India’s success in this era of globalization is subtly balanced on how well the nation leverages this unused (or otherwise misused) tool of FDI. With cross-border business transactions increasingly becoming the norm, rather than the exception, FDI, experts believe, is bound to occupy more space in economic agendas and policies of future governments.

The Indian story, in the FDI perspective, has been strangely apathetic – while the calamitously dismantled UPA II government intended to use it as a mere political handmaiden, opponents have scarcely devoted enough time and resources to fully comprehend the scale of improvement that properly implemented FDI policies can usher into the worn out economic fabric of the country. Thus, what was intended to become a potent economic weapon to refurbish the country, was reduced to a mere political gimmick that failed to earn enough mileage for its progenitors, and was hence dumped into a bottomless abyss of bureaucratic red-tapism and political slugfests.

A change of heads at the Centre, however, has given us a second chance to introspect the immense value of untapped potential of FDI. Let us, in this context, see why the concept, inspite of much fanfare adorning it immediately in the aftermath of the September 2012 inception, failed to take off in our country.

The two most vital elements that determine the fate of FDI in any country around the world are investment climate in the target nation and marketing of these conditions to the foreign countries that are potential sources of investment. Indian administrators and policy makers, unfortunately, have failed to devote enough attention to either of the two factors.

Firstly, archaic rules and regulations that are still in place in India have effectively sullied the investment climate to a grotesque extent – a phenomenon that led to the September 2012 legislations failing to inspire or motivate potential investors from taking any kind of a refreshed look at India. While the Manmohan Singh government did well enough to put up an impressive show of ‘investment friendliness’ on paper, it did scarcely anything to reinvigorate the home environment by striking down undesirable laws or moderating the existing ones to any appreciable extent. What appeared to be a piece of landmark legislation in the face of acute financial crisis, in 2012, was thus a far cry from the actual ground work-based decision making necessary to dispel the proverbial ‘investment gloom’ from the country.

Secondly, the fact that even the best investment destinations need a sturdy marketing framework has missed the Indian intelligentsia, by a country mile. The importance of on-ground marketing of the many qualities of India as a favourable investment destination, has hardly ever been put anywhere outside the closed doors of the mandarins of New Delhi. Experts on this subject have often expressed anguish at the lack of involvement of Indian embassies in foreign countries, in such marketing issues. While countries like Singapore, Germany and United Kingdom have steadily pursued a policy of using their embassies to promote investments at home, Indian embassies have been completely left out of discussions pertaining to FDI. The ruckus created in India following the introduction of the renewed FDI model in 2012 was mainly centred on the fanciful prognostications of foreign retail firms gnawing away at the economic freedom of smaller Indian retailers; scarcely anything was mentioned on ‘how’ or ‘whether’ those foreign firm would at all consider the prospect of investing an appreciable sum of money in India. Nearly 21 months since the launch of such fancy debates, India has earned barely anything from FDI inflows – the oft stated reason being ‘investors are still in the dark on certain rules and regulations manning the doors of the economy’.

By now, it is amply well comprehended that mere tinkering of the ‘percentage of permissible FDI’ in a particular sector, on paper, shall yield scarcely anything useful in the future. The actual change needs to be adopted ‘in practice’, and that can be achieved in two ways.

Firstly, embassies and certain sections of the finance ministry need to closely coordinate with each other on the issue of promoting India’s status as a favourable destination for investments. Indian embassies are ideally placed to spread the word about our latent potential to absorb investments and produce results, in places where the pompous announcements of our governments fail to reach. Besides, successive Indian governments need to cut across narrow political lines and holistically embark on a policy of collecting useful feedback from foreign investors, and act on them on a top priority basis.

Secondly, business associations like Confederation of Indian Industry (CII) need to step up to the mark and emulate some of the stellar achievements that they had themselves earned in the latter half of the 20th century. At present, most of these bodies have turned into sinecures for wealthy bureaucrats and entrepreneurs and have failed to pursue targets outside the purview of promoting the interests of their own organisations.

Complete absence of consolidation and clarity on the policy implementation front inside the country and scathing absence on marketing in foreign investment hubs has taken its toll on India’s rosy dreams of basking in the economic prosperity induced by copious FDI inflows. It is now for the Modi think-tank to take a long and hard look at whether to take a proper call on the future of FDI in India or let the issue stay open to the vagaries of the democracy. One hopes that Mr Modi now has the gumption to take the ‘strong decisions’ that he had talked about immediately after being sworn in as the Prime Minister of India.

Debotosh is an undergraduate in Chemical Engineering at Jadavpur University, Kolkata, He is a die-hard cricket aficionado, who loves writing on the Gentleman’s Game. Besides, he is a percipient interpreter of daily life and is never shy of responsibly opining on issues, which he finds worthwhile. A passionate admirer of silence and tranquility, he is currently discovering the many joys that stem from ‘positive thinking’. Reading and traveling too fall within the periphery of his myriad interests.

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