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Survey hints at easing FDI norms further

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Our Bureau

New Delhi, Feb 25

THE Government today stressed on the need to liberalise foreign direct investment (FDI) policies in sectors such as coal mining, insurance, real estate and retail trade.

According to the Economic Survey 2004-05 tabled in Parliament, there is a need for higher foreign investment, both in the form of FDI and foreign institutional investments (FII), as well as re-examining the existing investment caps in certain sector.

Stating that trade liberalisation, introduction of greater competition and liberal foreign investment policies have succeeded in transforming several segments of domestic manufacturing into globally competitive entities, the survey states that "there exists a strong case for revisiting the issue of caps in sectors such as coal mining, insurance, real estate and retail trade."

As of now, FDI in insurance and real estate is permitted in a limited way. FDI is also allowed in benefication of coal but is not permitted for undertaking mining of coal or lignite, though 100 per cent FDI is allowed in other areas of mining.

FDI is also not allowed in the retail sector. Stressing on the importance of allowing FDI in retailing, the survey states: "FDI in retail can not only organise a significant part of the largely unorganised domestic retailing, but can also invite established global retail brands into the Indian market, thereby creating greater outlets for sourcing and marketing Indian products. Organised retail formats will also help in upgrading the quality of products, establishing efficient supply chains from farm to market and generating greater employment."

Stressing on the general benefits of higher foreign investments, the survey says that such investment triggers technology spill over, assists human capital formation, contributes to international trade integration and particularly exports.

It also helps create a more competitive business environment, enhances enterprise development, increases total factor productivity and, more generally, improves the efficiency of resource use.

"Progressive global integration of the Indian economy has resulted in successful assimilation of many domestic industries in global production chains. Automobiles, software and electronics are important examples. Entry of foreign investment has helped these industries in achieving technological upgradation and higher value addition," it said.

However, it also pointed out that the benefits from FDI do not accrue automatically and evenly across countries and sectors. To reap the maximum benefits from FDI, there is a need to establish a transparent, broad and effective enabling policy environment for investment and to put in place appropriate framework for their implementation. Such an environment must provide incentives for innovations and improvement of skills and contribute towards improved competitiveness.

(This article was published in the Business Line print edition dated February 26, 2005)
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