The Manmohan Singh-led UPA government, possibly galvanised into action by surging criticism over policy gridlock, a series of corruption scandals and a slowing economy, has announced a slew of reformist decisions, including raising foreign direct investment (FDI) caps in several sectors such as telecommunication.
Foreign direct investment is always more welcome than portfolio investment, where funds can move out rapidly at the click of a mouse.
Yet, don’t expect a flood of dollars to gush in immediately. At $22 billion last year, FDI drives on a slower lane where sudden U-turns are difficult.
Actual inflow comes in with a time-lag as investment decisions are well thought out and are predicated on a variety of factors including global perceptions about the destination country.
Fresh and urgent policy pronouncements will, at the very least, help soothe frayed nerves of investors who fear that the government is more likely to be focused on political risk management rather than reverse the slowdown in the economy.
The proximate risks of the roiling investor sentiments are to two principal factors: policy inconsistency and political instability.
Investors want hassle-free entry into the Indian economy. India continues to be seen as a dodgy destination for anyone wanting to do business here, a fact that even the government now has begun to admit. Corruption, government red-tape and inter-ministerial differences were resulting in delayed decision making, which, in turn, can hurt business sentiment.
India is ranked 132 among 185 economies in the World Bank’s latest ‘Doing Business’ report. Starting a business in India is daunting. It requires going through 12 procedures, which can take 27 days and can be expensive. Registering a property or building a warehouse is also time-consuming.
The latest FDI policy overhaul is thus a welcome step as, besides raising caps in several sectors, the government has also eased norms allowing FDI to come in through the automatic route. This will hasten actual fund flow as investors will only need to make appropriate disclosures to the RBI, instead of routing these through the Foreign Investment Promotion Board (FIPB) — the nodal agency empowered to vet FDI applications in India.
Quick decision-making, speedier implementation and a non-interfering administration are vital to reverse the slowdown in India’s economy, spin jobs and multiply income. More importantly, India should be extra careful about sending out wrong signals to potential and existing investors.
If the next investment wave continues to remain centred on Asia, a frontline emerging economy like India cannot afford to be inconsistent in the way it welcomes foreign capital.
An economy battling to claw out of a decade-low growth, India is in dire need of resources to fund its infrastructure needs to build highways, ports, airports and railways. Delays and policy inaction can vastly erode the competitiveness of the Indian economy.