PERMITTING FOREIGN DIRECT Investment (FDI) in India remains a contentious area of economic policymaking more than a quarter century after the slow unwinding of Nehruvian socialism began. Even governments that are openly in favour of letting the private sector have its way hesitate to take ‘final steps’ in permitting foreign money in Indian businesses. On January 10th, the Government took a few more steps to permit FDI in some major sectors.
Norms for FDI in single-brand retail projects had been relaxed some years earlier. But even then, any investment above 49 per cent required Government approval, a headache for any potential investor. Now this rule has been eased and 100 per cent FDI is permitted via the ‘automatic route’. Tentative moves towards doing this were contemplated in the last year of the UPA regime, but that effort was stillborn. Political opposition from key regional leaders led to the ball being passed on to state governments for action. That was as good as having no policy at all. Any investor looks for a single investment decision and not multiple ones. In any case, multiple FDI policies for a single country makes nonsense of the idea of India as a single market. From a political perspective, too, having such a multiplicity is troublesome: India is one country and not a collection of nation-states.
Perhaps the worst aspect of the FDI policy for single- brand retail was that it came bundled with the onerous requirement of compulsory sourcing of 30 per cent inputs from India. On paper, it is a good idea, for it can ensure that small Indian manufacturers get a chance to join global supply chains. But in practice, it poses a number of difficulties: local suppliers may not even have the type or quantity of products that single-brand retailers want. This condition has been partially relaxed for the first five years after a global retailer opens its first store in the country.
There have been other relaxations as well. Foreign investment in civil aviation has been relaxed to aid the privatisation of Air India. This was, however, a matter of desperation. The money-guzzling national carrier requires funds that are beyond what the Government can afford.
What India needs to abandon is the incrementalism in its FDI regime. If India is to grow at a pace essential to create jobs for its teeming millions, it needs more foreign investment, and fast.