FDI surge. Really?

There has been some chest thumping lately about the 40 per cent surge in Foreign Direct Investment (FDI) into India in 2014-15. The $28.8 billion in inflows are cited as proof that the Modi government’s business-friendly policies are working. Yes, it a healthy trend that inbound FDI, which had declined for two years running, has revived this fiscal. But to interpret this as a signal that India is now a favoured destination for global investors is stretching the truth. The sobering fact is that despite being one of the fastest growing economies in the world in 2014, India attracted less than 3 per cent of global FDI allocations and 7 per cent of allocations to developing Asia. India’s FDI flows in 2014 were easily dwarfed by China ($128 billion), Brazil ($62 billion) and Singapore ($81 billion).

Then, there is the fact that the bulk of this FDI continues to chase the old areas of services, real estate, telecom and software, while manufacturers of automobiles, chemicals or metals received a mere tenth of the flows. There are several reasons why global corporations are wary of acquiring long-term business interests in Indian firms. For one, despite all the talk of liberalised FDI norms, it remains procedurally quite difficult for a foreign firm to complete an Indian acquisition, given the multiple regulators required to rubber-stamp each deal. The Etihad-Jet Airways deal hung fire for a whole year before the Securities and Exchange Board of India, the Competition Commission of India and the Directorate General of Civil Aviation, apart from the Foreign Investment Promotion Board and the Reserve Bank of India, saw eye to eye on it. Two, while policymakers seem focussed on overall FDI macro issues, most sectors in India are governed by tedious micro-level regulations which make it difficult to do business here. If there is the arbitrary 5:20 rule in aviation that debars international routes, general insurers have to grapple with irrational pricing caps and pension managers with curbs on fees and investments. Unless sectoral regulators let go of their tendency to micro-manage the commercial decisions of their constituents, it is doubtful if material progress can be made on the ‘ease of doing business’ in India. A tax regime that remains adversarial and the reluctance of Indian family-owned businesses to cede control also stand in the way of such deals. Daiichi Sankyo’s regulatory problems with Ranbaxy and continued skirmishes between United Spirits and Diageo Plc are hardly an advertisement for the high governance standards at Indian firms.

Given this backdrop, policymakers need to realise that merely liberalising sectoral caps for FDI across more and more sectors will not bring in a flood of capital. Foreign entrepreneurs, just like their domestic counterparts, are driven primarily by ROI (return on investment) considerations. And to make India an attractive destination for them, sector regulators need to take to heart Modi’s electoral promise of delivering better governance with less government.

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