Attracting FDI: Clarity in policy is the need of the hour

Mr Lakshmi Niwas Mittal, among the richest Indian in the world, gave a clear and blunt message. Wrapped in diplomacy, the message was clear and candid: “India may be high on the priority list of the (Mittal) group, but may not be high on the investment list.”

And the reasons are not far to seek. The Bathinda refinery and pipeline project implemented by HPCL-Mittal Energy Ltd required a whopping 598 approvals from various authorities. However he clarifies: patience is the most important word in the dictionary, “I am not giving up now, I will wait.”

Other investors do not seem to be this candid or considerate. They have begun to re-focus and re-deploy their investment strategies away from India. And the country seems to be a loner in the comity of emerging nations, still offering sanguine conditions for foreign investments, but receiving scarcely any. Things were not like this a couple of years ago.

Indian economy

What made the Indian economy tick? Several economists have noted that it was the large population, huge consumer market, big land size, rich raw material sources and rapid economic growth.

The conditions were just right for foreign investments to home in. A bevy of thriving business houses created bustling capital markets which attracted huge quantum of foreign institutional investments. The surging economy increased the purchasing power among the middle classes and creating a huge demand for goods and services.

The economic engine, which was idling along, started accelerating. Production of goods and services flourished. There was a huge inflow of foreign direct investments into infrastructure, power generation, mining and production as well as into services. The economy was clipping along nicely until the Lehman Brothers crisis broke out. The world began to slip into recession.

Foreign investments

Like the rest of the world, foreign investments into India too faltered. The country ran into an inflationary spiral. Major power projects were re-scheduled and mining and infrastructure projects stumbled. The growth momentum slowed down. And India was looking at a gloomy picture of heightened inflation, low growth rate and faltering foreign investments.

More so in foreign direct investments since they were seen as the catalyst for change, ensuring access to the latest technology as well as rapid and efficient transfer and adoption of “best practice” across borders. There were also huge funds that it brought in, cheap and for the long term.

But all that seems to have changed now. The rush of foreign direct investments has waned. Other emerging economies have regained the momentum while FDI have begun to ebb in India.

A recent paper published by the Reserve Bank of India on Foreign Direct Investment tries to analyse the causes behind this. It says that FDI inflows into India alone remained sluggish in 2010-11 while global flows to other emerging market economies recovered. This was despite India's sound economic performance ahead of the global recovery.

India and emerging economies

Strangely, while the pace of foreign direct investments into India had fallen in 2010, it has couple of unlikely developed countries for company – Germany and France. It might have been exalted company in other times and for other reasons. Now, the whole of EU region is in crisis with several countries mired in debt and queuing up for funds from ECB and other multilateral lending agencies.

However, India's case is not that desperate. But worry lines remain: it has broken ranks with other emerging economies like China, Russia, Hong Kong, Singapore and Saudi Arabia, which all registered positive growth in FDI flows.

The RBI report gathers evidence through a panel exercise that actual FDI to India during the year 2010-11 fell short of its potential level partly on account of policy uncertainty. However, surmises apart, the real reasons behind the ebbing FDI are still to be ascertained.

Liberalisation and growth

The report adds that the gradual liberalisation of the economy and opening up of the capital account brought in significant foreign investments. As part of this capital account liberalisation, FDI was gradually allowed in almost all sectors, except a few on grounds of strategic importance, subject to compliance of sector specific rules and regulations.

The rules governing FDI have remained the same, ever since. In fact there have been further opening up and liberalisation moves. So what has changed?

Citing another instance, the report noted that along with other emerging market economies, the GDP of India also improved during 2010. The current account balance as a percentage of GDP deteriorated in India also, along with other EMEs. The only exception was Argentina. Things don't seem much different in India vis-à-vis other emerging economies.

The major distinguishing factor was inflation, which was generally higher in India. But it had Argentina for company.

Regulatory policies

In recent past, various economists, policymakers, academicians and corporate researchers have suggested that India's regulatory policies in terms of procedural delays, complex rules and regulations related to land acquisition, legal requirements and environmental obligations might have played a role in holding FDI back.

They argued that the uncertainty created by the actions taken by policymakers might have led to unfriendly business environment in India. Has there been a change in the recent past in terms of regulatory policies? Quite unlikely: In fact, what seems more probable is that several regulatory policies which were on paper all along have been dusted out and effectively implemented.

Let us take the case of environment regulations. Several of the rules were only on paper until the Ministry of Environment and Forests started implementing them effectively. Then, the huge coal blocks and reserves under the control of the Ministry of Coal just became assets on paper. They were lying in forests and other environmentally sensitive areas.

FDI in mining and power generation went for a toss. The surplus resources scenario turned deficit. Lack of coal became endemic among power producers leading to power shortage. And FDI began looking elsewhere, away from this uncertainty.

Let all the rules of the land be implemented in-toto, without exception. But let there be clarity and discipline in their implementation. As Mr Mittal said, let the system be transparent and equitable. That alone will revive the interest among the foreign investors into India's long-term growth story.

>cj@thehindu.co.in

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