Right at the start of the fiscal year, India sees a rise in its foreign investment

By Prashansa Srivastava

The cumulative foreign direct investment (FDI) in April-May increased by 23% to $10.02 billion compared with $8.12 billion in the corresponding period last year. When the NDA government assumed power in 2014, India’s FDI flows were around $36 billion and since then have been consistently increasing. This is a testament to the investor friendly policies regarding incentives and infrastructure put in place by the government.

Reasons for this increase

The huge potential offered by India, the fastest growing major economy, along with a slew of liberalisation measures has made it an attractive investment destination. India was the highest ranked country by capital investment in 2015, with $63 billion-worth of FDI projects announced.

FDI got a large boost when their limits were enhanced in April in critical sectors such as defence, civil aviation construction and development, private security agencies, real estate, news broadcasting, and pharmaceuticals, opening them up for complete foreign ownership. This was instrumental in foreign investors committing more funds for their Indian operations. Except for a small negative list, most sectors are open for 100 per cent FDI under the automatic route, easing the task of foreign investors. Currently, 98 percent FDI into India comes through the automatic route.

In a move to empower individual government departments and expedite the clearance process, the Foreign Investment Promotion Board was also abolished on 17th April. FIPB was an interministerial body under the Department of Economic Affairs in the finance ministry responsible for processing FDI proposals and recommending them for approval to subsequent authorities. Timelines are now fixed for approval of FDI applications by competent authorities and rejections by the department concerned have been made difficult. The crux of all these reforms was to further ease, rationalise and simplify the process of foreign investments in the country and to put more and more FDI proposals on the automatic route instead of the government route so that minimum time and energy of the investors are wasted.

FDI in theory and practice

Foreign investments are considered to be crucial for India, as the country needs around USD 1 trillion to overhaul its infrastructure such as ports, airports and highways to boost growth. FDI also helps improve the balance of payments situation and strengthen the rupee against other global currencies, especially the US dollar. It has also had positive effects on the GDP and employment, with the Make in India campaign leading to a whopping increase in FDI job creation. However, for all the measures to be truly effective a number of structural issues must be addressed. For example, though limits have been enhanced in the area of defence, the capital intensive sector struggles with high-risk levels.

With project gestation periods running up to decades, risk levels for foreign investors are commensurately high. Instead of simple incremental changes, the government should have a clear, long-term defence acquisition road map, allowing private sector companies to plan ahead and manage risk effectively. Similarly, pharmaceuticals suffer the fate of high costs due to long cycles of research and development projects. This is counterproductive for both domestic players and their potential foreign investors.

In it for the long haul

Policies of the government have largely ignored the revival of public investment. Substantial public investment in education, health and environment, is a long term solution which will not only improve India’s socioeconomic condition but also crowd in domestic private investment. A heavy reliance on private foreign investment is dangerous. The inherent volatile nature can lead to unstable employment and an accentuation of income and regional inequalities. FDI-driven growth is not going to be natural and automatically balanced in the long run. Concerns about the distribution of wealth, social security schemes and income imbalances loom large.

FDI is a long-haul issue. The government has shown that it has the stomach for the needed policy changes. However, India’s policy environment must be conducive to economic growth. The government must show that it is cognizant of the other measures necessary for consolidating India’s attractiveness to foreign investors, keeping in mind the long-term economic health of the country.

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