For a capital-scarce economy, getting overseas investors to fund high growth sectors is, perhaps, the first step to create jobs and increase incomes. Investment decisions are usually guided by perception and so for the government it would be heartening that India has emerged as the most favoured destination for foreign direct investment (FDI) in 2015 so far — outpacing China and the US. According to the Financial Times, FDI inflows into India during January-June stood at $31 billion, ahead of China’s $28 billion and the US’ $27 billion.
That said, there are few caveats. In recent years, despite the size of the market, many overseas investors continued to see India as a difficult place for business. Corruption, red-tape and inter-ministerial differences resulted in delayed decision-making, hurting business sentiment.
Overseas credit rating agencies spared no punches in slamming India for slow reforms, cumbersome procedures, policy flip-flops and retrograde tax laws. This is in contrast to the current situation, where a turnaround seems to be happening among overseas organisations about India’s image.
For instance, India jumped 16 notches to 55 among 140 countries in the World Economic Forum’s Global Competitiveness Index, which ranks countries on the basis of parameters such as institutions, macroeconomic environment, education, market size and infrastructure among others. The big test, however, will be the World Bank’s Ease of Doing Business Report, which ranks countries on the basis of business rules. India was ranked 142 among 185 economies last year and the next report is due in a few weeks.
Prime Minister Narendra Modi’s hardsell in the US recently needs to be seen in this context. India is seeking to regain investor interest, particularly among US companies. Mr Modi, who rode to power promising to turn India into an economic powerhouse, opened up the insurance and pension sectors by allowing 49% foreign direct investment. The investor response is yet to match expectations and that is what he was looking to address in New York and the Silicon Valley.
Quick decision-making, speedier implementation and a non-interfering administration are vital for India to regain its lost status as an engine for global growth. The latest data on FDI inflow is welcome news, but as has been seen before, overseas funds flow can dry out fast following the faintest of wrong signals.
There are two factors that contribute to roiling investor sentiments: Policy inconsistency and political instability. Investors want hassle-free entry into the Indian economy. Quick decision-making, speedier implementation and a non-interfering administration are vital for India to regain its lost status as an engine for global growth.