Indian conomy needs more than FDI Reforms

Tue, 17 Nov Pre-Open

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In a move to perk up investment sentiments and give the economy a push, the union government recently eased the FDI (foreign direct investment) norms. The same were touching 15 sectors including private sector banks, media, single brand retail, defense, plantation crops and manufacturing. 

The measures came out as norms for allowing foreign investments in new areas. Also, some were aimed at permitting higher investment caps in a few sectors. Following were the major takeaways from the announcements-

• For the construction sector, several conditions are eased, including the lock-in clause for exit. For real estate segment, 100% FDI is declared in management of townships and malls.
• For the banking sector, 74% FII investment was announced.
• Forretail sector, manufacturers are allowed to enter retailing including e-commerce. Single brand retailers such as Marks & Spencer, Adidas, IKEA are allowed to sell products through e-commerce. Lastly, companies such as Apple are exempted from sourcing norms for single-brand retail.
• For plantations, 100% FDI is allowed in plantation of coffee, rubber, cardamom, palm oil and olive oil.
• For media and broadcasting, 100% FDI is allowed in DTH, cable networks, mobile TV and teleports. Also, no government approval is needed up to 49%.
• In defence sector, the investment limit for FIIs and venture capital is raised from 24% to 49%.
• Lastly 49% FDI is allowed in aviation sector under automatic route for regional air transport services.

All of the above measures will certainly bring more foreign investment flows into the country. However, a concern that remains is regarding domestic investment.

As an article in Business Standard suggests, the data on proposed domestic investments in the January-August period of 2015 show a figure of Rs 2,360 billion. This is said to be almost a third lower than Rs 3,320 billion recorded in the same period of 2014.

Domestic businesses have been hesitant to commit more funds over the past year and a half. The government, hence, needs to evaluate the reasons behind this pattern.

While the net figure for domestic figures stands negative, some rising trends were seen in investments for individual states. To be named these were Gujarat, West Bengal, Karnataka and Tamil Nadu. The government should therefore take assistance these states in understanding the crux behind getting more investments. It should track how and where they have succeeded. In conclusion, it should apply some of these understood lessons so that remedial steps can be taken for other states.

The FDI reforms are surely a big positive step by the government. They will set an environment of change in the investment cycle and the foreign fund inflows. Also, they have set a stage for the Modi led government to deliver more reforms to ramp up the overall economy. But opening up more avenues for FDI cannot be the answer to all problems. In order to deliver more, the government now needs to look at the domestic investments and try to bring them on track.

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